GameStop (NYSE:GME) burned many investors as its stock plummeted about 90% over the past five years. Sluggish mall traffic and competition from digital downloads torpedoed its core business, while steps into other markets -- like collectibles and mobile devices -- yielded mixed results.

But over the past month, GameStop stock rebounded more than 40% as three tailwinds emerged: a vote of confidence from a famous activist investor, an encouraging report about its store traffic, and insider purchases. But will these tailwinds give this stock enough momentum to avoid another nosedive?

An investor checks a stock price on a smartphone.

Image source: Getty Images.

A famous activist investor's big bet

In late August, Michael Burry -- famously portrayed by Christian Bale in The Big Short -- announced that his fund, Scion Asset Management, had acquired a 3% stake in GameStop for about $10.6 million.

Burry argued that GameStop's balance sheet was still healthy, that sales of new disc-based consoles next year would extend the retailer's life, and that long-term threats like cloud gaming were overblown. Burry also urged GameStop to repurchase nearly $240 million in shares, equivalent to about a fifth of its enterprise value, with its cash on hand.

This activist stake brought back many investors, but I spotted some flaws in his thesis. GameStop's balance sheet looks strong, but that's only because it sold its Spring Mobile stores to AT&T, eliminated its dividend, dialed back its buybacks, laid off workers, and closed stores.

Burry's argument that the disc-based PS5 and Xbox Scarlett will save GameStop is also weak, since Sony and Microsoft are both encouraging gamers to download more digital games from their first-party stores. Sony even stopped GameStop from selling digital download codes earlier this year, and Microsoft launched a disc-free version of the Xbox One -- which directly counters Burry's thesis.

Improving store traffic?

In late September, research firm Placer.ai reported that foot traffic at GameStop's stores rose 2.2% (from its baseline) in July and 4.7% in August. On a quarterly basis, its average daily visits in the third quarter rose 3.8% annually so far, versus declines of 5.6% and 3.9% in the first and second quarters, respectively.

Customers check out a game at a video game store.

Image source: Getty Images.

Placer.ai warns that rising store visits might not translate to higher same-store sales, since visitors could just be window shopping. However, the firm claims that it indicates GameStop still has the "brand equity necessary to drive a transformation."

GameStop's turnaround plan, dubbed "GameStop Reboot," mainly consists of:

  • Closing stores 
  • Cutting costs
  • Boosting store traffic and revenues by securing exclusive digital and physical products for customers
  • Becoming a "social and cultural hub for gaming" by expanding its PowerUp loyalty program
  • Training "more knowledgeable" associates
  • Testing out esports-oriented stores

I've expressed my doubts about those efforts before, but Placer.ai's numbers offer a flicker of hope that Reboot initiatives are paying off. However, investors shouldn't jump to conclusions until GameStop reports the official numbers.

Insiders are warming up to their company

On Sept. 20, GameStop director Carrie Teffner bought 21,118 shares at an average price of $4.73 for nearly $100,000. That purchase was significant, because it increased Teffner's total stake by 61%. And she wasn't the only insider to scoop up shares recently.

Over the past three months, GameStop's insiders bought 567,460 shares on the open market but didn't sell a single one. Over the past 12 months, they bought 2.75 million shares but sold only 115,916. Those purchases indicate that GameStop's management sees potential in the recovery.

GameStop's downside is limited at these levels, since it trades at less than five times forward earnings and well under its annual revenue and book value. Scion's take, insider purchases, and investor optimism about Placer.ai's findings should all help the stock tread water for now. However, even with the signs of a true value play, I remain pessimistic about GameStop's turnaround plans, and I'd like to see some real signs of improvement before I signal an all-clear on this beaten-down stock.