• GameStop stock soars 12% on short squeeze hopes.
  • GME stock rises to finish Thursday at $128.46 as equities and retail in particular recover.
  • The meme stock is set to report earnings next week.

GameStop (GME), the one that just will not go away, soared 12% on Thursday in a broad market recovery. The move higher in retail stocks was a relief rally following the carnage imposed on the sector by Walmart (WMT) and Target (TGT) earnings. However, solid reports from both Dollar Tree (DLTR) and Dollar General (DG) along with Williams Sonoma (WSM) helped entice investors back into the sector.

Online retail traders are also still a factor despite their number diminishing this year. Volume in GameStop on Thursday was about twice the average as the stock trended heavily across social media platforms. Retail traders are focused on another short squeeze, but we believe that is unlikely to happen. 

GameStop Stock News

The upcoming earnings should see more details on the launch of GameStop's NFT marketplace, due to its launch in the second half of this year. Already GME stock had ticked up last week as the company launched its GameStop Wallet for users to store and send cryptocurrencies and nonfungible tokens (NFTs), all the while staying within the GameStop experience.

GameStop is due to report earnings on June 1 after the close. Consensus earnings per share (EPS) is at $-1.22 and revenue estimates are for $1.32 billion. Even if GME matches these estimates, they are not exactly reassuring. EPS growth is headed in the wrong direction, falling 66%, and revenue growth is stuck at around +3% annually. Analysts have penciled in revenue growth to accelerate to nearly 8% by 2024, but that is still not comforting in our view. 

The latest data on video game sales shows a continued decline in the US – 8% in Q1 2022. GameStop is improving its revenue metrics but using too much capital to generate this revenue. So increasing revenue but also increasing losses makes no sense unless it is for the benefit of long-term investment. However, investing in crypto and the NFT space may be just at the time when this bubble is bursting. GameStop does have plenty of cash, over $1 billion due to astute cash raising during the meme stock phase. It also has low debt levels. so there is some value here, but investors are inflating the potential of new ventures.

GameStop Stock Forecast

It may already be time to sell based on intraday data on Thursday. A spike to $148 but a close significantly lower at $128 speaks to already slowing momentum. This is always one of our warning signs in meme stocks. Talk of sky-high borrowing costs pushed GME stock higher, but those costs are only applicable to retail, not to institutional players who are the real shorts. They will likely use the latest spike to add to short positions rather than reduce. They know the power of the retail army is waning, and the market has changed from 2021 and 2022.

Watch for tell-tale signs of a strong premarket and the first 30 minutes of trading before GME switches to red. If it does, then it is time to get out in our view. This is all about playing momentum and trying to time when that momentum has stalled. The 200-day moving average at $152 is an obvious resistance. And please stop with the buying of calls now! This move has caused volatility to spike. Higher volatility means higher option prices, so even if Gamestop does nothing call buyers are going to lose money on falling volatility. They are paying top of the market for volatility and likely top of the market for the underlying if you buy calls up here. Market makers will love them though.

GME daily stock chart

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