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Why GameStop Stock Dropped More Than 10% This Morning

By Rich Smith - Apr 12, 2021 at 11:39AM

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Ascendiant sees 90%-plus downside risk in GameStop stock.

What happened

Shares of GameStop (GME 3.27%) -- the original meme stock -- dropped more than 12% in early trading Monday before recovering to about a 10% loss around 11:15 a.m. EDT.

Don't blame Robinhood or Reddit or short-traders for this one, though. Blame Ascendiant Capital Markets, which downgraded GameStop stock to sell today.

Big red arrow going down over a stock chart

Image source: Getty Images.

So what

According to this morning, analysts at Irvine, California-based Ascendiant cut GameStop stock to sell and assigned the video game and console retailer a $10 price target that implies there's another 93% worth of downside risk in the stock.

The analyst warned that even with two new console launches in the fourth quarter, GameStop earned the bulk of its Q4 2020 profit not from selling games and hardware, but rather from reporting tax loss carryforwards from losses incurred in 2019 and earlier in 2020. As far as 2021 goes, the company declined to give guidance last quarter, citing uncertainty about how the pandemic would affect sales. And while online sales have grown at GameStop, it also poses a problem for GameStop in its role as a reseller of physical game discs and cartridges -- because 70% of game sales these days are digital-only.

Now what

In short, Ascendiant sees GameStop as a business model in terminal decline, and the fact that its stock trades in the triple digits today, warns the analyst, is solely "due to the popularity of GameStop on Reddit chat boards and with Robinhood retail investors."

The stock currently "appears to no longer trade on traditional fundamental valuations or metrics, but on retail investors sentiment, hope, momentum, and the powers of crowds." But once investors resume valuing GameStop on its (lack of) profits, the "share prices will come back down to match its current weak results and outlook."

The time to sell, warns Ascendiant, is before that happens. Not after.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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