GameStop (GME) stock price dives, short interest rises: what next?

GameStop (NYSE: GME) stock price has retreated sharply in the past few weeks as the meme mania faded. After soaring to $65.20 in May, it has plunged by over 62% to the current $24.93, costing investors over $1 billion.

The good and the ugly

GameStop, a video game retailer, has become one of the luckiest companies in the United States. In 2021, it became the poster child of the meme stock mania, which helped it raise money by selling shares.

The same trend happened in May this year as its stock surged from less than $10 to over $65. Again, the company used the surge to raise an additional $2.1 billion, which it has used to boost its balance sheet.

GameStop now has one of the best balance sheets in the American retail industry. It ended the last quarter with over $1.2 billion in cash and short-term investments, meaning that it now has over $3.4 billion in cash and no debt. These are substantial sums for a company that has a market cap of about $10 billion.

The challenge for GameStop is that its business is not doing well and has a bleak future. In its recent financial statement, the company said that its sales stood at over $1.79 billion, down from $2.2 billion a year earlier.

The same happened in the last financial year when sales dropped from over $5.9 billion to $5.27 billion. On the positive sign, the company has managed to turn a profit even as its business conditions worsened. Its net income in the last quarter rose to over $63 million.

Therefore, with GameStop, we have a company with a solid balance sheet but one whose business is struggling. We also have a company that is difficult to short because of its popularity among traders. With its short interest at 12%, there is a risk that it will see another short squeeze.

GameStop stock price analysis

GME chart by TradingView

I have covered GameStop several times in the past few months as you can find here. In an article in May, I pointed to a falling wedge pattern and predicted that the stock would have a strong rebound, which happened.

After soaring to a high of $65.20 in May, the stock plunged to about $25 this week. It has remained above the 50-day and 25-day Exponential Moving Averages (EMA) while the MACD and the Relative Strength Index (RSI) have pointed upwards.

Therefore, the GME stock price will likely bounce back in the coming weeks as buyers attempt to retest the crucial resistance point at $47.8, its highest point in August 2022. The alternative scenario is where GameStop’s shares continues falling and retest the 50-week moving average at $18.

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