For the last couple of years, investors have become enamored by the skyrocketing share prices of companies such as Nvidia and Palantir Technologies. Prior to the artificial intelligence (AI) revolution, however, these two companies were seldom covered in financial news circles.
It was just a few years ago that gaming retailer GameStop (GME 3.25%) was all anyone on Wall Street was talking about. But today, with shares down by 66% from all-time highs, GameStop appears to be a relic of the past -- forgotten about amid blossoming opportunities in the world of AI.
Well, following some management changes over the last couple of years, GameStop has quietly been changing its strategy in hopes of once again winning over the investment community.
Let's explore what triggered the excitement around GameStop in the first place and why shares subsequently sold off. From there, I'll dig into a new initiative at the company and explain why I think GameStop stock could be on the verge of going parabolic once again. Is now the time to scoop up shares in this once-upon-a-time Wall Street darling?
A brief history of the GameStop saga
The chart illustrates GameStop's revenue, net income, and share price over the last several years. The gray column toward the left side of the graph represents a short-lived recession during the early days of the COVID-19 pandemic.
GME Revenue (TTM) data by YCharts
One thing that might look off is that during 2021, GameStop's revenue was experiencing a precipitous decline -- as illustrated by the decreasing purple line. However, at this exact same time, the company's share price (the blue line) reached an all-time split-adjusted price of roughly $87.
Generally speaking, decelerating sales and modest profitability aren't the combination for a rising share price. So, what drove the excitement in GameStop?
During the peak days of the pandemic, a forum called r/wallstreetbets became popular on the chatroom website Reddit. A user on the website, who goes by the social media moniker Roaring Kitty, started promoting his analysis on GameStop.
What followed was a rising interest in GameStop from the retail investor community, with many investors blindly followed Roaring Kitty into investing in the stock. The pronounced buying activity in GameStop triggered a short squeeze of epic proportions -- and GameStop stock went to the moon for a brief moment in time.
As the financial profile clearly shows, though, GameStop's business has continued to struggle following the short squeeze from a few years ago. And with that, so has the company's stock price -- as it's never rebounded anywhere close to where it was trading during its peak.
Image source: Getty Images.
Why GameStop might be on the verge of going parabolic
As the graph shows, one thing GameStop has done a decent job of over the last few years is protracting its expense profile in an effort to maintain profitability during a time of consistent revenue decline.
It's how management is choosing to reinvest these profits that has caught my attention. In late May, GameStop issued a press release notifying investors that the company had purchased 4,710 Bitcoin.
Initially, GameStop shares dropped on this news -- implying investors were not thrilled by the company's choice to augment its balance sheet with cryptocurrency, which is generally a volatile asset.
As a reminder, technology company Strategy (formerly known as MicroStrategy) has employed a Bitcoin purchasing strategy in recent years. And despite its rather mundane financial performance, shares of Strategy have risen sharply almost in tandem with that of Bitcoin over the last several years.
It's my thinking that GameStop could witness a similar pattern.
Is GameStop stock a buy right now?
In my view, GameStop's decision to buy Bitcoin is performative. The financials explored here suggest the brick-and-mortar retailer doesn't have much in the way of tangible growth prospects.
If anything, GameStop's purchase of Bitcoin makes it even more of a meme stock in my opinion. I personally struggle to see a strategic reason for a gaming retailer to own cryptocurrency.
Similar to what happened with GameStop a few years ago, I could see a scenario in which the retail investor community lines up once again and plows into GameStop stock -- purely as a spectacle, and an extremely risky one at that.
Not only would I pass on an investment in GameStop, but I'd caution investors from falling for any narratives that might come about suggesting that owning the stock is a proxy for investing in cryptocurrency or Bitcoin specifically.
If you want exposure to crypto or Bitcoin, there are loads of other options, such as Coinbase and Robinhood, as well as exchange-traded funds (ETFs) focused on crypto themes.
For these reasons, I do not see GameStop stock as a buy right now -- despite its potential to rebound sharply as the company's Bitcoin strategy unfolds.
