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Why GameStop Is Tumbling This Morning

By Rich Duprey - Apr 21, 2020 at 12:01PM

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It reversed most of the gains it made yesterday.

What happened

GameStop (GME 3.18%) gave up almost all the gains it made yesterday from news of insiders buying shares as its stock tumbled over 13% in early-morning trading on no apparent news.

The video game retailer remains one of the most shorted stocks on the market with almost 99% of its float sold short, which could make its stock subject to large swings.

Man playing video game holding his head

Image source: Getty Images.

So what

It wasn't at all clear that the video game retailer was going to survive even before the coronavirus pandemic set in. Sales have plunged as gaming enthusiasts await the new consoles being introduced later this year from Microsoft (MSFT 0.65%) and Sony (SONY 0.13%).

The console upgrade cycle could provide a powerful boost to GameStop's business that would offset the potentially fatal transition to online gaming and digital game downloads going on now. The pandemic, however, has heightened the risk to the company. It seemed to recognize that and attempted to keep its stores open when other retailers were ordered closed, but the blowback it received forced it to shut its doors, too.

Now what

The big drop doesn't mean GameStop is a value stock. While its balance sheet will likely let it survive until the new game systems come, it's clear that unless GameStop develops a transformational business model, the digital future of gaming will eventually undermine its viability.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$40.70 (3.18%) $1.25
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$288.88 (0.65%) $1.86
Sony Corporation Stock Quote
Sony Corporation
SONY
$85.93 (0.13%) $0.11

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