Retail investors banded together on Reddit in January 2021 to force the price of GameStop (GME). Their purpose was to inflict significant losses for hedge funds and institutional investors who were betting against the stock or shorting it.

The “short squeeze” that followed marked the beginning of the “meme-stock mania.” It’s a movement marked by investors mobilizing on social media sites, which has never happened before in the history of capital markets.

Meme stocks are also distinct in that their prices do not always correspond to the broader market.

GameStop’s business fundamentals, like many meme stocks, are still far from ideal. In reality, the corporation made little progress in 2022, at least financially.

In the last four quarters, GameStop sales increased by only 1.3% year over year.

In addition, GameStop’s management was investing in a turnaround strategy that included technological projects. As a result, the company’s cash burn has increased during the last year.

GameStop announced significant losses in all four quarters of 2022, bringing the company even further away from profitability.

GME Moves in Lockstep with or Against the Market

In general, stocks tend to be positively connected. When the overall market rises, individual equities are more likely to rise as well. A rising tide, as they say, lifts all boats.

This is also true when the stock market falls – this is usually a poor omen for individual equities.

However, in recent GameStop history, we’ve seen the unusual occurrence of a stock having a negative beta, or connection to the market (in GME’s case, the S&P 500). GME’s beta fell as low as -34 at one point in 2021.

This meant that when the S&P 500 moved in one direction, GameStop’s stock moved in the opposite manner. When the market zagged, it zipped.

But then GME abruptly shifted to have a high beta — that is, one that is positively connected with the S&P 500. In mid-2021, the video game company’s stock registered a beta of 6.

GME is now at 2. That means that if the S&P 500 swings up or down, GameStop will follow it with twice the zeal.

The S&P 500 lost approximately 20% in 2022. Analysts anticipate that the index will expand modestly in the coming year.

And, because of GME’s high beta, if 2023 is a strong year for the S&P 500, it is likely to be a good year for GameStop as well.

GME’s Cash Position Aided the Company in 2022.

The video game store has a sizable cash reserve of $1.042 billion and almost no debt. In a macroeconomic environment of high inflation and rising interest rates, GameStop’s “comfortable” balance sheet position has provided — and continues to provide — some additional cushion.

However, it is worth mentioning that GameStop established this strong cash position as a result of the tremendous short squeeze that occurred in January 2021, when the company’s share price increased by nearly 2,000% in a short period of time.

GameStop’s management has already taken a more conservative attitude for 2023, recognizing that the majority of its cash position did not come from the company’s activities and that issuing more equity would depress the stock price.

Last quarter, management altered gears in order to attain profitability as soon as feasible by pausing technology expenditures and aggressively slashing costs.

We’re already witnessing the results of this new strategy, albeit in a little way.

GameStop’s SG&A (sales, general, and administrative expenses) were $387.9 million, or 32.7% of sales, in the third quarter, compared to $421.5 million, or 32.5%, the previous year.

This is an encouraging sign that the upward trend will continue in 2023.

Analysts predict that GameStop’s revenues will fall by around 1% this year. However, further cost-cutting measures could help GameStop become profitable and improve investor confidence.

Are Meme Investors Still Interested in GME?

One of the grounds for Wall Street’s mistrust regarding GameStop is its value in comparison to its retail industry peers.

Stocks with high multiples are naturally the first to suffer in an interest-rate rise scenario.

Because the meme-stock frenzy has inflated GameStop’s price, many GME bears and short sellers anticipate the company will soon return to pre-meme levels.

Indeed, GameStop’s stock dropped by roughly 50% in 2022.

However, the drop was less severe than in other tech and growth stocks including Tesla (TSLA), Meta (META), and Nvidia (NVDA), which plunged 69%, 64%, and 51%, respectively.

The fact that GME is majority-owned by highly engaged retail investors likely prevented the stock from falling even more in 2022.

Analysts believe that around 70% of GME’s total stock float is owned by individual investors who do not consider business fundamentals or values to be significant reasons for betting on GME. Instead, they are holding the stock in protest against predatory short-selling and the general state of the markets.

The most crucial thing to remember about GameStop stock is that it is still quite popular among retail stockholders on social media sites.

We recently witnessed investors on Reddit encouraging one another to register their shares directly with GME’s transfer agent rather than holding them in a brokerage account.

Based on the volatility of GME shares in 2022, we may conclude that GameStop’s retail investors fared far better than many predicted during an extraordinarily challenging year.

So, expect GME to thrive again in 2023, especially if the larger market grows.

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