GameStop (NYSE: GME) shares have exploded this January, and the price has advanced more than 250%. The current risk/reward ratio is not good for long-term investors, although some analysts say that the price of GameStop shares could advance even more.
Fundamental analysis: GameStop is overvalued
GameStop is an American video game, consumer electronics, and gaming merchandise retailer that operates in more than 5,500 retail stores worldwide. GameStop shares advanced 51% on Friday and were halted earlier after a near 70% intraday rise.
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The stock is up more than 250% in less than three weeks, and it is important to say that Bloomberg reported that the volatility has been at the highest level for the stock ever. There is no reasonable explanation for this jump, but some market analysts say that many bullish talks from the popular Reddit WallStreetBets forum influenced this.
GameStop shares could advance even more, but the current risk/reward ratio is not good for long-term investors, and my opinion is that this company is extremely overvalued. GameStop reported Q3 results at the beginning of December; total revenue has decreased by 30.6% Y/Y to $1B while Q3 GAAP EPS was -$0.29 (beats by $0.58).
Total revenue has decreased above expectations (misses by $90M) even though the pandemic pushed videogame sales to new records. Adjusted EBITDA was -$61.8M vs. +$7.7M a year ago, and these results certainly don’t justify the current share price.
“Our third-quarter results were in-line with our muted expectations and reflected operating during the last few months of a seven-year console cycle and a global pandemic, which pressured sales and earnings. That notwithstanding, we continued to significantly advance our strategic objectives of creating a digital-first, omnichannel ecosystem for games and entertainment and optimizing our core operations,” said George Sherman, GameStop’s chief executive officer.
Another essential piece of information is that GameStop director James Wolf sold 810K shares on January 12. The total value of sold shares was $17.19M, and James Wolf now owns 909,200 shares.
Technical analysis: If the price falls below $50, it would be probably a trend reversal sign
There are some apparent risks when it comes to trading this stock currently, and my opinion is that this company is hugely overvalued.
When we look at the chart above ( one year period), we can see that this stock price has advanced from $2.8 above $75. The critical support levels are $60 and $50; $70 and $80 represent the resistance levels.
If the price jumps again above $70, it would be a signal to trade shares, and the next target could be around $75 or even $80. On the other side, if the price falls below the $50 support level, it would be a firm “sell” signal and probably a trend reversal sign.
GameStop shares have exploded this January, the price has advanced more than 240%, but financial results certainly don’t justify the current share price. Some analysts say that the price of GameStop shares could advance even more, but my opinion is that this company is extremely overvalued. If the price falls below the $50 support level, it would be a firm “sell” signal and probably a trend reversal sign.