Here's Why GameStop Stock Is Plunging

Share price volatility isn't new territory for GameStop (NYSE: GME). The beleaguered video game retailer was the center of a short squeeze in 2021 that resulted in swings from sharp gains to losses -- and since then, the company has seen its stock price decline. The reason for the turmoil? GameStop's revenue has suffered as the video game market shifted to digital downloads, a blow to the retailer's business model.

The company has fought back by aggressively cutting costs, and it even recently announced another way to fill the coffers. But these moves haven't necessarily pleased investors enough to significantly -- and steadily -- boost the stock. Let's look at the latest on GameStop and find out what's driven its most recent declines.

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Image source: Getty Images.

When GameStop's troubles began

GameStop's troubles began well before the short squeeze as the move to digital hurt revenue growth. The situation worsened during the coronavirus lockdowns, which kept people out of stores, and instead at home and online. This has continued as customers adopted this new way of accessing the latest games.

By 2021, short positions represented 140% of GameStop's shares held by public investors. This means that these investors were betting on the stock's decline. This figure of more than 100% shows that some shares were shorted multiple times. Shorting a stock involves borrowing shares and immediately selling them, then ideally purchasing them in the future at a lower price to return to the owner -- and gaining on the price difference. If the stock rises, though, short sellers must buy the stock at a higher price, and this may result in dramatic losses.

In 2021, a movement led by retail investors to rapidly buy GameStop shares caused the stock to soar, creating a short squeeze, and short sellers rushed to buy the stock to cover their positions. All this led to meteoric gains and then sharp declines for the shares.

Since that time, GameStop has taken steps to recover, cutting costs to favor profitability. For example, in fiscal 2023, it ended operations in Ireland, Switzerland, and Austria, and in 2024, the company sold its Italian subsidiary. This year, it announced a planned exit from France and Canada. GameStop closed 590 U.S. stores in 2024 and expects to close a "significant number" in 2025.

The company says its focus is on profitability, expanding its addressable market by selling products such as graded collectibles, and becoming the go-to entertainment destination both online and in-store. This has helped net income, but so far revenue continues to decline.

GME Net Income (Annual) data by YCharts.

GameStop's recent decline

Now, let's consider the reason behind GameStop's recent drop. The shares have plummeted 15% over the past 10 days. In March, the company announced that it would start investing in Bitcoin, an approach employed by Strategy, previously known as MicroStrategy. To fund this and other corporate needs, GameStop announced the private offering of $1.3 billion of convertible senior notes.

As part of this plan, GameStop made its first Bitcoin investment in recent days. On May 28, GameStop announced the purchase of 4,710 Bitcoin. This happened as Bitcoin declined, and though it's great to buy an asset when it's trading at a lower value, any drop in cryptocurrency -- viewed as a somewhat risky asset -- could make investors a bit nervous.

GME data by YCharts.

This, along with concerns about embarking on a Bitcoin investment strategy as well as questions about how GameStop might boost growth over the long term, was enough to put pressure on the stock price in recent days.

So, considering all of this, is GameStop a buy right now? GameStop's stock remains volatile, but even more concerning, the company's earnings gains are linked to cost cutting -- and revenue growth prospects aren't yet clear. The move to invest in Bitcoin could be a winning one, but it doesn't solve this main major problem of revenue growth. What types of products and services will help GameStop stand out in the future and lift revenue? Before investing, it's important to have the answer to that question and see that translate into revenue gains.

GameStop remains high-risk -- and a player that I would watch from the sidelines right now.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.