- Shares of GameStop (GME) are falling again following a March rally.
- Some investors may be considering buying GME stock ahead of a planned stock split.
- Be careful, as market conditions are not in GameStop’s favor.
Following months of steady declines, GameStop (NYSE:GME) “Apes” received some relief in March. A short-lived rally in “risk-on” plays and news of Chairman Ryan Cohen increasing his position in GME stock helped drive shares from less than $80 to nearly $200 in just over two weeks. Since then, however, shares of the video game retailer and meme stock legend have pulled back below the $150 level.
This move is in line with the overall market. Last month’s shrugging off of the Federal Reserve’s rate hikes has morphed into growing concern that rising rates will lead to an economic slowdown or a recession.
Investors may be tempted to buy the dip in GME stock, especially given management’s plans to implement a stock split. But keep in mind that external factors are likely to outweigh any boost from the split plans. In the month ahead, GME stock could easily drift back below $100 per share.
| GME | GameStop | $148.85 |
Will Split Plans Be a Catalyst for GME Stock?
In late March, GameStop announced plans for a stock split that would roughly triple its number of shares from 300 million to 1 billion. GME stock initially shot up on the news.
This stock split plan is in the early stages. Shareholders still need to vote and approve it. However, given that many stocks have seen a lift from splitting (even as it changes nothing about the stock’s underlying value), it is likely shareholders will approve a split of GME stock.
But does it make sense to buy ahead of this event, entering a position now and selling if/when shares pop on further developments related to a split?
You may chalk up last month’s big spike in GME stock to the news of Cohen’s insider buying, but the market’s renewed enthusiasm for meme plays likely played a larger role. In other words, company developments are serving more as an accelerant, with market conditions determining which direction the stock moves.
For the split to result in a dramatic move higher for shares, investor sentiment needs to be on its side. Put simply, that’s far from a given.
Market Conditions Are Not on GameStop’s Side
Last month, the market seemed to declare interest rate hikes and other Fed monetary tightening measures were no big deal. Yet, so far this month, it seems they’ve started to once again become a concern. Analysts and economists are warning of increased recession odds, with those at Deutsche Bank and Goldman Sachs saying to expect one in 2023.
This, of course, doesn’t mean it will be smooth sailing for stocks until then. I wouldn’t count on a repeat of the short-lived euphoria for “risk-on” plays we saw last month. As interest rates rise, risky, richly-priced equities (including meme stocks) could continue to experience downward pressure.
In short, it’s risky to buy GME stock on its stock split catalyst. There’s no guarantee a split approval and implementation will move the needle for shares. And unfavorable market conditions are likely to weigh on GME stock over the next year, perhaps pushing it back below $100 per share.
Avoid GME Stock For Now
The speculative frenzy that helped GME stock make history will continue to cool. As it does, some of the more skittish “Apes” could also cash out.
As I’ve long argued, once GameStop’s pool of meme-focused shareholders thins out, shares will in time move toward a more rational price. That would be a price that accurately accounts for the upside potential of its e-commerce transformation plans. Whether that’s in line with analyst price targets or below them doesn’t matter. It will be a price well below what shares trade for today.
Given the extent to which market conditions will drive its next move, don’t buy GME stock due to its planned split.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.