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Why GameStop Stock Slumped Today

What happened

Shares of GameStop (NYSE: GME) were down 6.2% on Monday after the broad U.S. stock indexes took a tumble in reaction to the China Evergrande Group (OTC: EGRNF) situation this weekend. The meme stock, which is now up 922% year to date, actually had some positive news announced today, but that still didn't prevent GameStop from selling off in line with the indexes.

So what

Evergrande is a large property developer from China. Investors have become increasingly worried about the company's solvency because of its inability to pay the interest on its debt. The company has so much debt that if it defaults, it could seriously affect the Chinese economy. These concerns have trickled over to Western markets today, and are likely why U.S. stocks are down 2% to 3% today.

Image source: Getty Images.

Since GameStop is a highly volatile meme stock, it is no surprise that it fell twice as much as the broad indexes on Monday. This was no fault of the company, just some volatility that happens in the stock market from time to time.

But GameStop did announce today that it will be hiring 500 new employees for its customer care center in Florida. While not direct news about the company's profits or sales, this is an indicator that GameStop's business might be doing well right now (you wouldn't hire 500 customer care employees if there were no customers to take care of). The next few earnings releases will let investors know for sure if this is the case.

Now what

While a new customer service center might be a good sign for GameStop's business, it doesn't mean the stock is a buy. With a market cap of $14.5 billion, negative net income over the last 12 months (and many of the prior years), and an industry -- physical video-game sales -- that seems headed for the history books, GameStop still looks like an incredibly risky investment at these prices. Serious investors who want to build their personal wealth still need to stay far, far away from this stock at the moment.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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