What happened
GameStop (GME -1.77%) shareholders beat a flat market this week, with shares soaring 20% through Thursday trading compared to the 0.1% uptick in the S&P 500, according to data provided by S&P Global Market Intelligence.
The rally wasn't tied to shifting fortunes for the video game retailing business, but instead can be traced to a general rebound in several hard-hit meme stocks.
Image source: Getty Images.
So what
GameStop and its fellow meme stock AMC Entertainment Holdings had each shed over 30% of their value since just the start of 2022. That slump followed a brutal end to 2021. In fact, heading into this week, GameStop was down 44% since early November.
Both GameStop and AMC Entertainment recovered some of that ground over the last few trading days, although GameStop is still trailing the wider market's 5% decline so far in 2022. The retailer's popularity with momentum-focused traders means its stock price moves are often divorced from the business and occur mainly thanks to short-term spikes in social media interest.
Sure, there are encouraging signs that the world is emerging from the omicron pandemic wave, which should help GameStop's customer traffic. The retailer carries almost no debt, too, making it less exposed to rising interest rates.
Now what
GameStop is far from a thriving business, though. Cash outflow in the third quarter was nearly $300 million. The company is booking significant operating losses as it attempts to pivot into an e-commerce focus while closing unproductive stores.
It's unclear how, or even whether, GameStop can return to a pace of steadily expanding sales and earnings. Most investors expect revenue declines in 2023, for example, after the company reaches roughly $6 billion in annual sales this year.
GME Revenue (TTM) data by YCharts
GameStop routinely booked around $9 billion of revenue in its best retailing days around 2016. But investors should be skeptical about an impending return toward that sales level as they consider buying this highly volatile meme stock.
