Here’s What History Says About a Short Squeeze in GameStop After Its Earnings Report

In 2021, meme stocks GameStop (GME) and AMC Entertainment (AMC) have taken stock markets by storm. Retail traders on social media platforms have come together in a rebellion against hedge funds. GME and AMC stocks skyrocketed as a result of Redditors’ coordinated actions, and they’re up an incredible 976 and 1,976 percent in 2021, respectively.

Both GME and AMC stocks have surged despite the companies' operating performance declining over the last few years. GameStop is scheduled to report its earnings results for the second quarter of fiscal 2021 after the market closes on Sep. 8. What’s the forecast for GameStop stock, and is another short squeeze coming after the earnings release?

In the second quarter, analysts expect GameStop's sales to rise 19.2 percent YoY (year-over-year) to $1.1 billion. The company’s revenue grew by 25.1 percent in the prior quarter, marking the first time in three years that the video game retailer's revenue rose YoY. In the second quarter, Wall Street also expects the company's adjusted net loss to narrow YoY to $0.67 per share from $1.40.

GameStop has been attempting to shift its focus to online sales, resulting in the closure of numerous physical stores. The company has made good progress on its e-commerce plans, and its online sales as a percentage of its overall sales are gradually increasing. One of the appeals of GME stock to retail traders is Ryan Cohen's unconventional vision and influence as chairman. GameStop and AMC raised cash by selling shares several times to survive amid the COVID-19 pandemic.

Investors should note that GME stock has fallen an average of about 15 percent in response to 10 of its previous 11 financial reports. Also, the company’s management has refused to take questions from analysts over the last two quarters.

According to MarketBeat, analysts' average target price for GME stock is $22, which is 89 percent below its current price. Among the seven analysts tracking GME, five recommend "sell" and two recommend "hold." None recommend "buy." Their highest target price of $50 is 75 percent below the stock's current price, while their lowest target of $5 is 98 percent below.

The original meme stock's surge occurred in late Jan. 2021, when its short interest exceeded 100 percent of its shares outstanding. It didn’t take much to trigger a short squeeze. Now we've reached the opposite extreme of the spectrum. Just 10.2 percent of GameStop's shares are now being sold short, the lowest level in more than a decade.

Retail traders will watch GameStop’s second-quarter results for signs that its operating performance is improving and its efforts to strengthen online sales are paying off. However, GME's valuation has been off for the last few months, and with its short interest at its lowest since 2008, a lot of positive catalysts are needed for the party to continue. Overall, the possibility of a short squeeze after its second-quarter earnings report seems limited.

Support.com (SPRT) could be a short-squeeze candidate, as Ortex estimates that 85 percent of its float is sold short. The company has scheduled a shareholder vote for Sep. 10 to approve a reverse merger with Bitcoin transaction processor Greenidge Generation.

EV (electric vehicle) stocks have been a battleground for short-sellers in 2021, with Nikola being one of the most controversial. On Jul. 29, federal prosecutors indicted Nikola founder Trevor Milton on three counts of criminal fraud for misleading investors. Milton left the company after Hindenburg Research accused him of making false assertions about the company's technology. According to Ortex, Nikola's short interest is 43 percent of its float.

Workhorse and Blink Charging are other EV stocks that have struggled. Both are potential short-squeeze candidates if EV stocks heat up again.