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GameStop continues to fall after Reddit surge. Here's why you shouldn't be surprised

From declining sales to shuttered stores, the underlying value of this company is still questionable, and stock gains don't change that.

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- 04:40
GameStop

GameStop's stock price won't help the stores make more money. 

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GameStop's stock price soared last week due to a concerted effort by traders on Reddit. The video game retailer's shares grew by more than 14,300%, but they've since plummeted, going from $328 on Friday to a close of $53.50 on Thursday. Fans of the stock continue to hold their GameStop shares to stick it to Wall Street and hedge funds, but don't be fooled, the company isn't doing so hot. 

The share price for GameStop doesn't tell the whole story about the company. Indeed, one of the reasons for its stratospheric gains is that so many institutional investors were betting on it to fail -- to an absurd degree. That type of investing, known as short selling, opened the door to individuals who coordinated their efforts online to drive up the price. 

Stock prices have, at some level, always been disconnected from reality for the average American (just stack 2020's stock market gains against the pandemic-fueled economic collapse), but this GameStop roller coaster ride throws all logic and basic investment principles out the window. To those on the WallStreetBets subreddit, that's the point. 

Lost in all the hoopla is that GameStop continues to falter when it comes to all the important metrics for a company, with declining sales and the closing of 462 stores last year. Let's take a look at how GameStop is performing as an actual business, and not just as the target of some enthusiastic individual investors. 

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How is GameStop really doing as a company? 

Not that great. According to its fiscal third-quarter earnings report from December, GameStop's sales declined 30% from the previous year. And that was during a pandemic, when the video game industry experienced months of increased revenue as Americans stayed home and played games because of lockdowns. But sales at retail stores suffered due to locations closing or the limited flow of customers as a result of those same lockdowns. 

Meanwhile, digital sales for games reached new heights. Major publishers such as Sony, EA and Take-Two reported that digital purchases surpassed physical sales in 2020, according to Daniel Ahmad, an analyst at Niko Partners. Microsoft's Game Pass, which lets gamers access more than 100 games for $15 a month, hit 18 million subscribers, CEO Satya Nadella said on the company's second-quarter earnings conference call. 

Cloud gaming also grew in 2020. Microsoft's xCloud and Nvidia's Geforce Now launched last year, following Google's Stadia service, which came out in late 2019. These services let players stream games without the need for physical copies of games or even consoles.

In September 2019, GameStop CEO George Sherman tried to get gamers back into stores by turning a few test stores into hangouts for customers. But the company closed 462 stores in 2020, with plans to shutter more than 1,000 stores total by March. It still has more than 5,000 stores in the US. 

What is GameStop's actual worth? 

On Dec. 1, GameStop's stock price was $15.80 a share, which gave it a market value of slightly more than $1 billion. As of Friday, the retailer's shares were trading at $325 apiece, valuing the company at more than $22 billion. That put it at No. 464 on the Fortune 500 list, right behind video game publisher Activision Blizzard. The jump in stock price vaulted the value of GameStop over that of game publishers Ubisoft, Take-Two and Square Enix. Thursday saw the shares continue their fall to $53.50, making the market cap for the retailer at approximately $3.7 billion.

Was GameStop going under before the stock price jump?

Though the retailer struggled in recent years, it wasn't at death's door. 

"I actually think they are in a good position to grow revenue and earnings again with the console launches," said Wedbush analyst Michael Pachter. "Earnings power like that supports a price in the high teens or low 20s."

Pachter has GameStop's stock at a target price of $16. Keep in mind this is just one analyst's assessment.

The retailer did receive some help in recent months thanks to the release of the PlayStation 5 and Xbox Series consoles. Both are still in high demand and selling out swiftly whenever they're in stock. GameStop reported $1.7 billion in sales this past holiday season. Online sales made up 34% of the total holiday sales, which was a 300% increase from the previous year. 

GameStop said it will bring on Matt Francis, an engineering leader at Amazon Web Service, to be the company's first chief technology officer, according to a report from Marketwatch on Wednesday. He will oversee GameStop's e-commerce operations when he starts on Feb. 15.

What's important to know is that GameStop's inflated prices don't equate to financial success. It still has problems that need to be addressed.

Remember that while deciding whether this is a roller coaster you'd want to brave.