GameStop (GME 1.07%) and Bed Bath & Beyond (BBBY) were two of the market's hottest meme stocks last year. Both companies experienced massive short squeezes last January, but their stocks have declined sharply since hitting those frothy levels. GameStop's stock hit a split-adjusted all-time high of $86.88, but it now trades at about $25. Bed Bath & Beyond's stock rallied to a multi-year high of $52.89, but it's now only worth about $5 a share.

Both stocks lost their luster as rising interest rates drove investors away from speculative meme stocks and other risky investments. But could either of these meme stocks stage a comeback and generate a five-bagger return in the near future?

A person in a crown flashes a handful of cash.

Image source: Getty Images.

What do the valuations and short interest tell us?

GameStop looks cheap at 1.2 times this year's sales, but Bed Bath & Beyond looks even cheaper at 0.07 times this year's sales. Some 17% of GameStop's outstanding shares were being shorted as of Sept. 29, compared to 38% of Bed Bath & Beyond's outstanding shares.

Bed Bath & Beyond's lower price-to-sales ratio and higher short interest indicate that investors are a lot less optimistic about its turnaround potential. But it also suggests that Bed Bath & Beyond's stock might spring back a lot faster than GameStop's if it actually makes some meaningful progress. 

Which company is growing faster?

GameStop and Bed Bath & Beyond both overexpanded during their heydays but now face existential challenges. GameStop's sales of physical video games through brick-and-mortar stores are being rendered obsolete by digital downloads, which generate much higher margin revenue for game publishers. Its sales of consoles, accessories, and collectibles also face stiff competition from big e-commerce platforms like Amazon, superstores like Walmart, and other retailers.

Bed Bath & Beyond is also losing business to Amazon, Walmart, Target, IKEA, and other big retailers that sell similar products. It's failed to keep pace with those competitors in terms of prices, product selection, and digital efficiency, and a lack of stable leadership prevented it from formulating a meaningful turnaround strategy. But as the following table illustrates, GameStop pulled out of its nosedive last year as Bed Bath & Beyond's sales continued to decline.

Period

FY 2021

FY 2020

FY 2019

FY 2018

FY 2017

GameStop revenue growth

18% (21%) (22%) (3%) 7%

Bed Bath & Beyond revenue growth

(15%) (17%) (7%) (3%) 1%

Data source: Company earnings reports.

GameStop has a slightly brighter future

GameStop stopped the bleeding by aggressively reducing its brick-and-mortar store count, which declined from 7,276 at the end of fiscal 2017 to 4,573 at the end of fiscal 2021. It also expanded its e-commerce platform and attempted to sell more collectibles, hardware, and accessories to reduce its dependence on its software business.

Analysts expect GameStop's revenue to rise 4% this year and another 3% in fiscal 2023. But it still isn't profitable, and it still lacks a clear path toward profitability since it relies heavily on markdowns to drive its sales.

Bed Bath & Beyond also shuttered a lot of stores and divested some of its non-core stores like Cost Plus World Market, buybuy BABY, Christmas Tree Shops, Harmon Stores, Of a Kind, and One Kings Lane. It ended fiscal 2021 with 953 stores across all its store types, compared to 1,557 stores at the end of fiscal 2017. But it failed to win back shoppers, even as it launched new private label brands, offered steep discounts, and expanded its online marketplace.

Unlike GameStop, which retreated back into its gaming niche as it shrank its business, Bed Bath & Beyond couldn't find fresh ways to stand out against Amazon, Walmart, Target, and other retailers. It even hired Target's former Chief Merchandising Officer Mark Tritton as its new CEO in 2019 to reboot its business, but ultimately fired Tritton earlier this year when those strategies failed to meaningfully boost its sales. It still doesn't have a permanent CEO.

Analysts expect Bed Bath & Beyond's revenue to decline 23% this year and slide another 4% in fiscal 2023. It recently decided to close about 150 of its namesake stores and lay off 20% of its workforce to streamline its business and cut costs, but it's still expected to remain deeply unprofitable for the foreseeable future.

So which of these stocks is a potential five-bagger?

It might initially seem easier for Bed Bath & Beyond to deliver a five-bagger return since its price-to-sales ratio is so low. But its liabilities could easily overwhelm its assets before its sales ever start growing again.

It also wouldn't be easy for GameStop to generate a five-bagger gain from these levels, since it already seems reasonably valued at one time this year's sales. But if GameStop can right-size its business, ditch its sales of physical games, and attract more shoppers to its dedicated marketplace for digital downloads, gaming hardware, and collectibles, it might just have a chance of surviving and generating multibagger gains over the long term.

I personally wouldn't buy either of these speculative stocks as interest rates continue to rise. But if I had to pick one long-term survivor (and possible multibagger), I'd definitely pick GameStop over Bed Bath & Beyond.