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The world's largest video game retailer GameStop (GME - Free Report) stock surged 74.4% on May 13, 2024 following the return of Keith Gill, also known as Roaring Kitty, to social media after a three-year absence. His reappearance on the platform X reignited excitement among retail investors as he initiated the meme stock rally during the pandemic.
The stock GME has about 6.24% exposure to YieldMax Ultra Option Income Strategy ETF (ULTY - Free Report) and 3.3% exposure to Amplify Video Game Tech ETF (GAMR - Free Report) . The fund ULTY jumped about 5.8% on May 13 and the fund GAMR added 1.9%.
Previous Short-Squeeze Story of GameStop
Shares of GME stock skyrocketed as much as 688% in 2021, thanks to the meme mania. In January 2021 itself, GME shares gained over 1600%. The spike in buying by individual investors on online forums that time trapped short sellers, who had anticipated that the stock would decline. Facing potentially massive losses, these investors were compelled to purchase the stock, thereby driving its price even higher.
In fact, Gill gained notoriety in 2020 and 2021 as a key figure behind the GameStop short squeeze. His activities led to a hearing before the House Financial Services Committee regarding potential market manipulation.
Does 2024 Mimic 2021?
This time also, sentiment around GME stock is bearish. GameStop has a Zacks Rank #5 (Strong Sell). GameStop posted fourth-quarter fiscal 2023 results in March, delivering lower-than-expected earnings per share and revenues. While the top line declined year over year, the bottom line compared favorably with the year-ago quarter’s reported figure. Higher inflationary pressures on consumers’ spending in the gaming industry have been resulting in lower demand and in turn, weighing on the company’s results.
The company’s cash position is also weak. During the 53-week period that ended Feb 3, 2024, the company used cash flow from operations of $203.7 million against an outflow of $108.2 million during the same period last year. Free cash flow during the same period was a negative $238.6 million.
Year-over-year earnings growth estimate for the upcoming quarter is 28.57% while the current year’s earnings growth estimate is negative 100%. The company is expected to see a 19.2% slump in revenues in the quarter ended Apr 2024 while projected sales growth for the current year is negative 12.76%.
Valuation ratios are unfavorable for the stock. The forward P/E ratio of GameStop is 1,746X versus the underlying Retail - Consumer Electronics industry’s P/E of 879.16X. Price/Sales of GME stock is 1.01X versus 0.69X of the underlying industry. Price/Book (P/B) ratio of GME is 3.98X versus the industry P/B of 2.56X. Price/Cash Flow (P/CF) is 72.48X versus the industry’s measure of 9.52X.
Any Silver Lining?
In the trailing four quarters, although the company's earnings missed the Zacks Consensus Estimate in the last reported quarter but beat in the other three, leading to an average earnings surprise of 46.41%. The stock has an upbeat VGM (Value-Growth-Momentum) score of “A”.
Should Buy GME-Heavy ETFs?
Meme stock investing doesn’t suit all. Just as stocks can rise quickly, they can fall just as fast. For example, GME's value dropped nearly 70% in February 2021. With such dicey fundamental background (as indicated above), volatility around GME trading must be high.
However, this doesn’t mean that GameStop can’t rally further. Hence, investors who do not have a strong stomach for risk, can try investing in GME-heavy ETFs. After all, ETFs significantly reduce company-specific risks.
ULTY in Focus
The fund ULTY is an actively managed ETF that seeks to generate monthly income from a portfolio of covered call strategies, each on a U.S. listed security. A covered call is an options trading strategy that offers limited return for limited risk. The fund charges 114 bps in fees and yields 15.23% annually. The yield is another plus for investors.
GAMR in Focus
The underlying EEFund Video Game Tech Index tracks companies actively involved in the electronic gaming industry including the entertainment, education and simulation segments. The fund charges 75 bps in fees.
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Should You Buy GameStop-Heavy ETFs on Meme Mania?
The world's largest video game retailer GameStop (GME - Free Report) stock surged 74.4% on May 13, 2024 following the return of Keith Gill, also known as Roaring Kitty, to social media after a three-year absence. His reappearance on the platform X reignited excitement among retail investors as he initiated the meme stock rally during the pandemic.
The stock GME has about 6.24% exposure to YieldMax Ultra Option Income Strategy ETF (ULTY - Free Report) and 3.3% exposure to Amplify Video Game Tech ETF (GAMR - Free Report) . The fund ULTY jumped about 5.8% on May 13 and the fund GAMR added 1.9%.
Previous Short-Squeeze Story of GameStop
Shares of GME stock skyrocketed as much as 688% in 2021, thanks to the meme mania. In January 2021 itself, GME shares gained over 1600%. The spike in buying by individual investors on online forums that time trapped short sellers, who had anticipated that the stock would decline. Facing potentially massive losses, these investors were compelled to purchase the stock, thereby driving its price even higher.
In fact, Gill gained notoriety in 2020 and 2021 as a key figure behind the GameStop short squeeze. His activities led to a hearing before the House Financial Services Committee regarding potential market manipulation.
Does 2024 Mimic 2021?
This time also, sentiment around GME stock is bearish. GameStop has a Zacks Rank #5 (Strong Sell). GameStop posted fourth-quarter fiscal 2023 results in March, delivering lower-than-expected earnings per share and revenues. While the top line declined year over year, the bottom line compared favorably with the year-ago quarter’s reported figure. Higher inflationary pressures on consumers’ spending in the gaming industry have been resulting in lower demand and in turn, weighing on the company’s results.
The company’s cash position is also weak. During the 53-week period that ended Feb 3, 2024, the company used cash flow from operations of $203.7 million against an outflow of $108.2 million during the same period last year. Free cash flow during the same period was a negative $238.6 million.
Year-over-year earnings growth estimate for the upcoming quarter is 28.57% while the current year’s earnings growth estimate is negative 100%. The company is expected to see a 19.2% slump in revenues in the quarter ended Apr 2024 while projected sales growth for the current year is negative 12.76%.
Valuation ratios are unfavorable for the stock. The forward P/E ratio of GameStop is 1,746X versus the underlying Retail - Consumer Electronics industry’s P/E of 879.16X. Price/Sales of GME stock is 1.01X versus 0.69X of the underlying industry. Price/Book (P/B) ratio of GME is 3.98X versus the industry P/B of 2.56X. Price/Cash Flow (P/CF) is 72.48X versus the industry’s measure of 9.52X.
Any Silver Lining?
In the trailing four quarters, although the company's earnings missed the Zacks Consensus Estimate in the last reported quarter but beat in the other three, leading to an average earnings surprise of 46.41%. The stock has an upbeat VGM (Value-Growth-Momentum) score of “A”.
Should Buy GME-Heavy ETFs?
Meme stock investing doesn’t suit all. Just as stocks can rise quickly, they can fall just as fast. For example, GME's value dropped nearly 70% in February 2021. With such dicey fundamental background (as indicated above), volatility around GME trading must be high.
However, this doesn’t mean that GameStop can’t rally further. Hence, investors who do not have a strong stomach for risk, can try investing in GME-heavy ETFs. After all, ETFs significantly reduce company-specific risks.
ULTY in Focus
The fund ULTY is an actively managed ETF that seeks to generate monthly income from a portfolio of covered call strategies, each on a U.S. listed security. A covered call is an options trading strategy that offers limited return for limited risk. The fund charges 114 bps in fees and yields 15.23% annually. The yield is another plus for investors.
GAMR in Focus
The underlying EEFund Video Game Tech Index tracks companies actively involved in the electronic gaming industry including the entertainment, education and simulation segments. The fund charges 75 bps in fees.