Should You Buy GameStop Stock After the Split?

GameStop (NYSE: GME) is capturing headlines since it announced a 4-for-1 stock split after the markets closed on Wednesday, July 6. The brick-and-mortar game retailer's shares spiked on the day following the announcement.

The recent news has some investors asking if it's a good opportunity to buy GameStop stock. What follows is an explanation of what the stock split could mean for investors, and an evaluation of the question of whether GameStop stock is a buy.

GameStop's stock split is almost meaningless.

GameStop's board of directors approved a 4-for-1 stock split that will take effect on July 22. After the markets close on July 21, shareholders will receive a dividend of three additional shares of the company's common stock for each share they hold. However, ownership percentages will not change. Shareholders will have their shares split into smaller slices.

It's similar to buying half of a pizza. Regardless of how many pieces you slice that half into, you're still left with half a pizza. So why is GameStop conducting a stock split if it means no change in ownership -- or much else, to be frank? Arguably to take advantage of the interest from enthusiastic retail investors over stock splits.

GameStop's stock split is no reason to buy the stock.

Given that the stock split is almost meaningless, it is no reason to consider buying GameStop stock. Moreover, since GameStop's stock is overvalued and in a declining industry, there was little reason before the announcement to buy the stock either. The company was part of the meme stock frenzy in 2021, which caused its share price to soar despite declining performance.

GME EPS Diluted (TTM) Chart

GME EPS Diluted (TTM) data by YCharts

Indeed, GameStop has lost money on the bottom line for four consecutive years, and revenue has fallen by a compound annual rate of 4.5% over the last decade. The trouble arises from its business model, which is buying and selling physical copies of games while people are increasingly shifting to digital purchasing. There is no quick path for the company to pivot to stop bleeding money.

Meanwhile, GameStop is trading at a price-to-sales ratio of 1.6, substantially higher than its valuation before meme stock investors poured in. Additionally, it is more expensive than brick-and-mortar retailers Costco (NASDAQ: COST), Walmart (NYSE: WMT), and Target (NYSE: TGT) -- all of which have significantly better prospects in the near and long term than GameStop.

WMT PS Ratio Chart

WMT PS Ratio data by YCharts

Investors would be prudent not to be enticed by gimmicks like stock splits and social media chatter and focus more on a company's fundamental performance in revenue and profits. In other words, GameStop stock is not a buy because of the stock split.

10 stocks we like better than GameStop
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and GameStop wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of June 2, 2022

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Target. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.