The revived craze for GameStop is confusing Wall Street. It’s ‘not in a position to be profitable’

The return of Roaring Kitty sparked a jaw-dropping advance in GameStop shares in the US overnight, but such a speculative rally in an unprofitable company will likely end badly once again. Roaring Kitty, the man who inspired the meme stock mania of 2021, resurfaced online with a cryptic image showing a video gamer in a chair leaning forward as if to indicate he’s taking the game seriously. That was enough to spark a buying frenzy among amateur traders. Shares of GameStop surged as much as 110 per cent higher with a slew of trading halts for volatility. Roaring Kitty — whose legal name is Keith Gill — in 2021 encouraged an army of day traders to pile into the gaming stock, an episode that made Wall Street history. The “meme stock” frenzy involved individual investors taking aim at short sellers and hedge funds who were pessimistic about the outlook for GameStop and other companies, forcing them to cover their short positions and drive up the price of the target stocks. However, from a fundamental standpoint, the brick-and-mortar video game company isn’t deserving of such a pop in the stock price. In late March, GameStop said it cut an unspecified number of jobs to reduce costs and reported lower fourth-quarter revenue amid rising competition from e-commerce-based competitors. “I don’t know of anything fundamental that would drive the stock this high,” Michael Pachter, Wedbush analyst covering GameStop, said. “They are not in a position to be profitable.” “They made $US6 million ($9.1m) last year and burned cash,” Pachter said. “We expect them to lose $US100m a year going forward. It’s a race to see if they can close stores fast enough to limit losses, but they have no plan that would suggest they can grow revenues or profits, and their core business is in decline.” Pachter has a underperform rating on GameStop and a $US5.60 price target. At Monday’s peak, GameStop hit $US38.20. During 2021′s mania, GameStop shares hit an all-time high of $US120.75 intraday, adjusted for a subsequent 4-for-1 stock split in the summer of 2022. But as interest from individual investors eventually faded, the stock collapsed along with other meme names. GameStop hit a three-year low of $US9.95 last month. The revival of the meme stock craze is happening at a relatively quiet time for the broader market, with the first-quarter earnings season winding down and the next Federal Reserve policy meeting about a month away. The Cboe Volatility Index, known as the VIX or Wall Street’s fear gauge, shot above 20 last month but it’s been trading around 13 as of late. Jeff deGraaf, chairman and chief executive of Renaissance Macro Research, said while he’s not at all involved in the GameStop trade, he could be looking to take advantage of the wild swings in meme stocks. “We don’t traffic in that stuff, but as a rule, we are sellers of overbought downtrends. That’s all GME is to us,” deGraaf said. Still, the surge in the animal spirits could spell trouble for the broader market that is already fragile to the shifting expectations for the direction of interest rates. “If this is still the type of market we are in, perhaps Jerome Powell should raise interest rates to the moon,” Bernstein analyst Mark Schilsky said in a note to clients. GameStop short sellers lost almost $US1b in monster rally The jaw-dropping rally in GameStop on Monday caused losses approaching $US1b for short sellers. With GameStop soaring 74 per cent, short-selling hedge funds suffered a mark-to-market loss of $US838m in the retailer, data firm S3 Partners said. “Expect short covering in this stock as it already had a 100/100 squeeze score prior to today’s trading,” said Ihor Dusaniwsky, S3 managing director of predictive analytics. Currently, the short position in GameStop shares amounts to more than 24 per cent of all its shares that are freely available to trade, also known as the float, according to FactSet. Including Monday’s losses, short sellers in GameStop have lost $US1.24b in May alone, according to S3. “Squeeze related buy-to-covers will be helping to push GME’s stock price higher — but also expect new short sellers to jump into this trade as GME stock prices around or above the $30 level will be attractive entry points for new short selling,” Dusaniwsky said. Short selling is a strategy in which investors borrow shares of a stock at a certain price in expectations that the market value will fall below that level when it’s time to pay for the borrowed shares. GameStop was not the only meme stock that was on the rise Monday. AMC jumped 15 per cent, while Reddit traded 9 per cent higher. “Short sellers may be in for a bumpy and bloody ride in these stocks,” Dusaniwsky said. CNBC