Video game retailer GameStop Corp. (GME) in Grapevine, Tex., provides games and entertainment products through its e-commerce properties and various stores in the United States, Canada, Australia, and Europe. GME shares skyrocketed earlier this year, driven by retail investors on forums such as Reddit's WallStreetBets and easy-to-access platforms like Robinhood Markets, Inc. (HOOD).  But the stock tumbled to multi-month lows on December 13. GME shares have slumped 25.9% in price over the past month to close the last trading session at $155.64. However, the stock is still up 949.5% for the year and 726.1% year-to-date.

Randy Frederick, managing director of trading and  derivatives at Charles Schwab in Austin, Texas, explained the recent dip saying, "People that have been investing in meme stocks have all their money in the market, and there's not any more left." Furthermore, traders are shifting away from riskier assets in the year's final weeks, which might have triggered the sell-off in GME last week.

However, GME shares soared 7.6% intraday in the last trading session. The record-setting release of movie Spider-Man: No Way Home helped the two best-known meme stocks, AMC Entertainment Holdings, Inc. (AMC) and GME, to end the week on a positive note. The rise in AMC had triggered the rally in GME. "It's a classic meme stock rally," Steve Sosnick, chief strategist at Interactive Brokers, surmised.

Here is what could shape GME's performance in the near term:

Poor Profitability

GME's 24.12% gross profit margin is 32.8% lower than the 35.89% industry average. Its net income margin and levered FCF margin of negative 2.61% and 2.86%, respectively, are substantially lower than the 6.56% and 5.88% industry averages.

Moreover, GME's negative 14.71%, 4.07%, and 5.38% respective ROE, ROA, and ROTC compare with the 17.23%, 5.94%, and 7.56% industry averages.

Stretched Valuation

In terms of forward EV/Sales, GME is currently trading at 1.84x, which is 30.8% higher than the 1.41x industry average. Also, its 1.97 forward Price/Sales ratio is 69.1% higher than the 1.16 industry average. Also, GME's 6.22x forward Price/Book  is 77.8% higher than the 3.43x industry average.

Weak Bottom Line

GME's net sales increased 29.1% year-over-year to $1.30 billion in its fiscal third quarter, ended October 30. However, its operating loss stood at $102.90 million, up 63.3% from the same period last year. Its net loss grew 460.6% from its year-ago value to $105.40 million. The company's adjusted net loss per share came in at $1.39, missing the consensus estimate by 167.3%. In addition, its trailing-12-months net operating cash flow and levered free cash flow came in at $159.20 million and $168.14 million, respectively.

POWR Ratings Reflect This Bleak Prospects

GME has an overall D rating, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

GME has an F grade for Value. Its stretched valuations justify this grade. The stock also has an F grade for Stability, which is consistent with its beta of negative 1.90. Also, it has a C grade for Growth, in sync with its mixed financials.

Of the 44 stocks in the Specialty Retailers industry, GME is ranked #42.

Beyond what I have stated above, one  can also view GME's grades for Sentiment, Momentum, and Quality here.

View the top-rated stocks in the Specialty Retailers industry here.

Bottom Line

GME was one of the most popular stocks in the meme stock frenzy earlier this year. The stock rallied to astronomical price highs. However, the gains were short-lived due to its weak fundamentals. The stock still looks overvalued at its current price level. But the company posted bigger than expected losses in its latest quarterly report, while analysts expect its EPS to decline 41.8% in the current quarter. Its EPS is expected to decline 48.2% per annum over the next five years. Also, considering its negative beta, we think the stock is best avoided now.

How Does GameStop Corp. (GME) Stack Up Against its Peers?

While GME has an overall POWR Rating of D, one might want to consider investing in the following Specialty Retailers stocks with an A (Strong Buy) rating: Destination XL Group, Inc. (DXLG), Cato Corporation (The) (CATO), and Aaron's, Inc. (AAN).

Click here to checkout our Retail Industry

GME shares were trading at $150.71 per share on Monday morning, down $4.93 (-3.17%). Year-to-date, GME has gained 699.95%, versus a 22.13% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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