These 2 Stocks Are Trending on Reddit, But Should You Buy Them?

Users of the online forum Reddit have made waves on Wall Street this year, drawing attention to the collective power of individual investors in the process. The social platform helped spark a few short-squeezes earlier in 2021, and it helped fuel cryptocurrency Dogecoin's tremendous gains these past few months as well.

Recently, the stocks for GameStop (GME 0.64%) and Tesla (TSLA +0.15%) have had Reddit buzzing. Given the online community's track record, it's worth taking a closer look at both of these stocks and why they are getting so much attention. Here's what investors should know.

1. GameStop

GameStop is a video game-focused retailer that operates 4,816 stores across North America, Europe, and Australia.

Image source: Getty Images.

Given its heavy dependence on brick-and-mortar-store-based sales, the pandemic was a significant headwind last year. Even as e-commerce sales soared 175% in the fiscal year 2020, total revenue plunged 21%, gross margin dropped 480 basis points, and the company posted a net loss of $215 million. In fact, GameStop hasn't been profitable on a GAAP basis since fiscal 2017.

To stabilize its business, the company announced a multi-year transformation plan in 2019. Since then, GameStop has closed 1,014 stores and doubled down on its digital-first business model. To be fair, e-commerce sales improved significantly in 2020, hitting 34% of total sales, up from 12% in the prior year. But GameStop's efforts still appear to be too little, too late.

Back in 2009, 20% of video games were sold digitally, while 80% were sold as physical discs. By 2018, those numbers had flipped, with digital sales hitting 83% of the total. From that perspective, GameStop is significantly behind the curve and its business appears to be stuck in the past.

Moreover, popular gaming platform creators like Microsoft and Sony have launched successful cloud gaming services that reduce consumers' need for GameStop and those services are helping both companies operate at orders of magnitude more profitability than GameStop.

Not surprisingly, GameStop's financial performance has deteriorated in recent years.

Source: GameStop SEC filings. CAGR = compound annual growth rate.

Looking ahead, GameStop's future is uncertain at best. That's the main reason why I wouldn't put my investment dollars anywhere near this stock.

2. Tesla

Tesla is the leading manufacturer of electric vehicles (EVs) worldwide. Despite headwinds created by the pandemic, the company delivered a strong performance last year.

Tesla delivered 499,550 vehicles in 2020, a more than fourfold increase over the 112,000 deliveries in 2019. That helped Tesla capture 16% of the EV market, while second place Volkswagen came in at 13% market share.

Image source: Tesla.

Last year, Tesla ramped up Model Y production at the Fremont, California, factory in the U.S., and in China, it launched the Model Y and boosted Model 3 output to 5,000 cars per week. Notably, Tesla's focus on manufacturing efficiency continued to pay off, as the company achieved an industry-leading operating margin of 6.3% in 2020.

Moreover, management believes this advantage is sustainable, citing efforts to further expand capacity and localize production as key drivers of efficiency. To that end, Tesla will start making the Model Y at two new facilities in 2021: Gigafactory Berlin in Germany and Gigafactory Texas (near Austin) in the U.S.

In the first quarter of 2021, Tesla continued to impress. The company achieved record-breaking production and deliveries even without making a single Model S or X. At the same time, operating margin improved 100 basis points over last year, reaching 5.7%. And Tesla retained its market-leading position, still with 16% market share.

In general, Tesla's top line has benefited from strong demand. But the company's bottom line is also improving, driven by its scalable approach to manufacturing.

Source: Tesla SEC filings. CAGR = compound annual growth rate.

Several catalysts should keep Tesla's business on an upward trajectory. In the near term, the company plans to start deliveries of the redesigned Model S -- the car that boasts an industry-leading range of 402 miles. The return of this high-end model could help boost the average selling price, which fell 13% in Q1.

Likewise, the Model 3 recently became the best-selling premium sedan in the world, surpassing the BMW 3 Series and Daimler's Mercedes E Class. Tesla foresees similar success with the Model Y -- in fact, the company believes it will become the "best-selling vehicle of any kind globally."

Here's the bottom line: Despite a truly outrageous valuation of 622 times earnings, there's a lot to like about Tesla stock. While I definitely wouldn't buy the stock in bulk at the current price, I think it's OK to pick up a few shares here.