Warren Buffett has famously said, "you don't find out who's been swimming naked until the tide goes out." To that end, the 57% drop in its stock price since November 2021 may be a clear indication that GameStop (GME 7.58%) is offering up a sight that isn't suitable for a younger investor audience.

GameStop stock has been the poster boy for the meme stock phenomenon and it has benefitted from it greatly over the past two years. Outsized investor interest has helped push the stock price to levels at which the company's board felt it could justify a stock split. Still, the performance of its business lines during this time should be leading stockholders to question whether they should continue to rely on the momentum of this retail stock, or get out.

The power of meme investors

GameStop's deteriorating business model made it not much better than a penny stock by the fall of 2020 as investors feared the company would disappear amid online competition. Many institutional investors shorted the stock on that premise.

However, meme investors noticed the heavy short interest and the relatively small number of shares available to trade. They generated buzz online that induced buyers to counter these shorts, taking the stock from below $2 per share at one point to just above $120 per share at its peak.

Though GameStop could not sustain its high, it has not lost the backing of meme investors who have remained faithful amid the recent sell-off. The higher stock price allowed it to sell shares and attract funding, helping GameStop to keep its doors open.

GameStop's evolving strategy

While the stock has sustained itself somewhat, the business side of GameStop's recovery still lacks sustainability as the company really doesn't have a competitive advantage that investors like to see from a stock. The popularity of game downloads has hurt GameStop's core business. GameStop has tried to evolve by switching its business model from one dependent on stores selling physical copies of games to a more robust online presence. It set up a one-stop online shop where consumers can find games from multiple manufacturers, potentially aiding the consumer. Instead of going to a manufacturer's site, which only features games made by one developer, GameStop offers a much more extensive selection. The problem is, video game platform operators like Sony's PlayStation, Nintendo's Switch, and Microsoft's Xbox offered competing sales sites that weren't all that different. For instance, GameStop wasn't able to gain a price advantage over these rivals online.

In another effort to revive itself (as well as give customers a reason to visit the physical stores), GameStop expanded its alternate revenue streams, like collectibles. Similarly, another segment heavily promoted by GameStop is its non-fungible token (NFT) marketplace, which it launched on July 11. It has marketed it heavily, claiming that its first-ever NFT collection, Gmerica 1, gives off "some serious summer in the city vibes." Gmerica 1 claims almost $600,000 in trading volume as of the time of this writing.

Nonetheless, overall business performance has been underwhelming. GameStop claimed over $3 million in payment volume in the first three days, but the excitement around the marketplace quickly fizzled. Over the last 30 days, the top 50 collections only generated around $6 million in payment volume. Of that, GameStop takes a 2.25% share, which amounts to just under $140,000 in revenue.

Additionally, investors should not ignore competition from other marketplaces. With DraftKings and numerous other players competing, GameStop likely has a long way to go before it can become one of the best NFT marketplaces. 

Consider avoiding GameStop stock

Given a lackluster business performance, investors should expect a low tide to bring some indecent exposure to GameStop stock. Indeed, meme stock momentum is a powerful, but unpredictable, force. The rising stock price breathed new life into GameStop, and the company rightly changed strategies to revive itself.

However, investors tend to reward success, not survival, and its new business lines appear not to offer any meaningful competitive advantages. Hence, do not expect GameStop's recent moves to excite more than a small group of meme stockholders.