If fundamental investors are investigating, then the price action behind shares of GameStop Corp. (NYSE: GME) other than a few tweets that would be considered borderline stock manipulation from Keith Gill, A.K.A. 'Roaring Kitty.' This is not the first time Kitty has come on the scene to make GameStop stock soar.

In 2021, the online persona sent tweets and YouTube videos, making bold assumptions about valuing GameStop. Three years later, these assumptions have yet to take root. Because 2021 brought lower interest rates and cheap money into the economy, investors found it easy to get behind risky stories, but that’s not the case today.

A high-interest rate environment, worrying inflation, and the growing trend of stagflation (low economic growth and high inflation) make the perfect cocktail for stocks like GameStop, or ‘meme stocks,’ to find it hard to survive long. Here’s why the recent price action may be short-lived on a fundamental basis.

What Investors Need to Know About GameStop’s Weak Financials

Taking recent data within the company’s fourth quarter 2023 earnings results, investors can find trouble beyond contracting sales, which fell to $1.8 billion from $2.2 billion a year prior (an 18% decline).

Investors tend to focus on the bottom line in a company’s income statement, precisely the net income, to drive their valuations and investment conclusions. However, this is often a misleading number to be wary of. Net income can be manipulated by a few accounting loopholes, which can hide potentially harmful trends under the rug.

GameStop’s financials show a net income of $6.7 million in the past quarter, compared to a net loss of $313.1 million a year prior. Of course, that would seem extremely bullish until investors read further down to the number of outstanding shares.

The fourth quarter of 2022 carried 304.2 million shares outstanding, while the past quarter reported 305.2 million. So, if the company made $6.7 million in net income, why would it issue shares and dilute shareholders?

Well, it’s because the business didn’t make money, and here’s how to tell. Free cash flow (operating cash flow minus capital expenditures) is a more thorough way to measure a business’s profitability, which cannot be easily manipulated through accounting gimmicks.

GameStop's FCF was negative by roughly $18.7 million in the past quarter. Last year, the company had a positive FCF of $326.6 million due to rolling over its tax expense and using cash raised from share dilution to postpone the need to take on further accounts payable.

As the business ran out of ways to finance its ongoing operations again, it saw the need to raise its stock price to unjustifiably high levels to issue more expensive shares, as no institution in its right judgment would lend money to GameStop through bonds.

GameStop Stock Forecast For 2024 Isn’t Rosy

At least, that's what Wall Street analysts believe. With a current consensus price target of only $7 a share for GameStop stock, today's prices' potential downside is 77.8%.

More than that, the stock has very little institutional ownership—only 29.2% today—a sign that so-called ‘smart money’ wants to stay away from this company. Over the past month, GameStop’s short interest increased by 6.3% to cap Roaring Kitty’s attempt to send this stock flying again.

Too many negative factors suggest the stock has reached a top outside of further manipulation. Still, one of the factors carrying the most weight is the overall state of the economy today.

U.S. GDP growth was revised down to 1.3% over the past quarter, while inflation remained above 3% during that time, a dynamic befitting of a phenomenon called inflation. Because of this, the largest asset managers and retail investors will focus on growth above all else, and GameStop won’t deliver on that requirement.

More than that, the stock is fighting against cyclically high interest rates, which tend to give the overall market a ‘risk-off' perspective and further drive capital away from stocks with an uncertain future. Unfortunately, GameStop is also part of consumer discretionary stocks, which are negatively affected by high interest rates as well.

Free cash flow reigns king in these environments, and that’s just something GameStop can’t give investors right when they need it most.