Stock of the week - GameStop (11.03.2021)

• GameStop is once again subject to elevated volatility

• Retail traders pushed the stock back above $250

• Retailer plans to launch e-commerce operations

• Stimulus checks seen as opportunity for meme stocks

• Stock retreated after testing $350 area

A mania around GameStop (GME.US) and other meme stocks looks to be returning, although some say that it has never faded. Shares of the company rallied this week and jumped above $300 during Wednesday's session on Wall Street. Let's take a look at current newsflow concerning the stock as well as outlook for meme stocks in general.

Volatility returns

GameStop was a central stock in the early-2021 Reddit retail investor mania. Volatility on GameStop shares as well as other meme stocks in picking up again and markets is once again increasingly paying attention to Reddit investors' actions. GameStop bounced from the $30-40 area in mid-February to over $250 and trades at the highest level since end-January. The company has been trading as the biggest company in Russell 2000 index and accounted for around 30% of index' total turnover on Wednesday, March 10. Gains accelerated this week and some name recent actions of the company as a trigger - GameStop has approached a major shareholder and asked for help with e-commerce transition.

GameStop is one of the most heavily traded Russell 2000 companies and accounted for 30% of total index turnover on Wednesday. Source: Bloomberg, XTB

Online shift?

GameStop has been operating as a brick-and-mortar retailer but it may be set to change. Company has asked Ryan Cohen, co-founder of Chewy and GameStop major shareholder, to help it with a transition towards online business. It looks like management of the company realized that there is no way for GameStop to remain competitive in the digital age without e-commerce operations. However, even if this is the case, it will probably take some time to set up such operations and it is unlikely to cause an immediate massive jump in sales. At least, not to the degree that would justify current market valuations.

Stimulus approaches

While upbeat fundamental news is certainly a reason for investors to be happy, speculation remains the main driver behind GameStop's games, just as it was the case in January. However, is a rally going to end with bust this time as well? Limits imposed by retail brokers were triggered for popping of a bubble last time and public outrage resulting from the situation may make brokers think twice before deciding for a similar move again.

However, one thing that needs to be mentioned as it may have a massive impact for GameStop and other meme stocks is US stimulus. The House of Representatives passed a $1.9 trillion economic package and President Biden is expected to sign it into law on Friday. Package includes $1,400 stimulus checks, that will be distributed to persons earning less than $75,000 annually. According to a survey of retail inventors conducted by the Deutsche Bank, traders plan to invest almost 40% of their stimulus money into stocks, with young investors willing to spend more than older ones. Stimulus checks will provide Reddit army with a large pool of money and they are most likely to be used to buy meme stocks. Stimulus checks are expected to be sent within two weeks after Biden signs the economic relief package so current volatility on GameStop may be just the beginning and more action may be coming by the end of March.

GameStop (GME.US) rallied this week, gaining almost 100% over the past three days. Stock reached daily high near $350 yesterday but has plunged 50% later on to test support zone ranging between 61.8% retracement of recent upward impulse and $175 handle. Trading is expected to remain volatile as Reddit retail traders are once again taking aim on the stock. Aforementioned $175 and $350 are near-term levels to watch. Keep in mind that meme stocks are likely to become even more active after US stimulus checks arrive (expected by the end of March). Source: xStation5