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Why GameStop Stock Rallied In Recent Days

Shares of GameStop gained strong upside momentum after the company became popular again on Reddit’s WallStreetBets. Shares of other “meme stock”, AMC Entertainment Holdings, also enjoyed a strong rally. It also looks that Beyond Meat has become the next target of the social media crowd as its shares have moved from the $100 level to $140 in less than two weeks while trending on Reddit.

GameStop also benefited from rumors about the company’s potential move into the non-fungible token (NFT) market, although it is not clear whether GameStop stock needs any catalysts other than increased popularity in social media.

It should be noted that the volume of trading in GameStop shares dropped in recent months but the stock failed to develop sustainable downside momentum despite its rich valuation which signaled that retail traders did not rush to exit their positions.

What’s Next For GameStop?

Analysts expect that GameStop will report a loss of $0.9 per share this year and a loss of $0.53 in the next year, but the market ignores valuation concerns.

It looks that professional investors and traders have underestimated the ability of retail traders to hold their positions despite huge volatility. The possible explanation for this phenomenon is that speculative positions of retail traders are often modest in size which makes it easier to stomach huge volatility.

While GameStop is trading at more than 3 price-to-sales which is an absurd valuation for a retailer, the market will continue to ignore valuation concerns as everyone is focused on the stock’s popularity in social media.

In this light, speculative traders should pay attention to Reddit and Twitter trends rather than the company’s financials which will have little or no impact on the near-term trading of the stock. Once GameStop shares get out of fashion in social media, they will likely develop downside momentum.