GameStop: The Bull/Bear Debate Continues With Underlying Fundamentals At Odds With Growth Expectations
The trading action that we’ve witnessed throughout 2020 when it comes to Gamestock (GME) shares has been truly fantastic. On a historical scale, the violent swings that GME has experienced, combined with the massive trading volumes associated with the stock, make the recent GME trade a historically significant moment. In future years, professors will be discussing the action that we’re seeing right now in behavioral finance 101 courses across the world. And, with that in mind, it should come as no surprise that GME continues to be one of the most discussed stocks in the entire stock market amongst analysts, journalists, and bloggers alike.
During January, a massive short-squeeze rally occurred, pushing GME shares up to their 52-week highs of $483/share. This was such an awe-inspiring move because for the vast majority of the two years prior to the late 2020 rally, GME shares traded in the single-digits.
Since making their nearly $500/share highs, GME shares tumbled, falling all the way back down to the $40 area in late February. But, during March, shares rallied again rising back up to the $265 area, before falling to the $190 threshold where they trade today.
Speaking of this volatility, in a recent article, Matthew Fox of Business Insider highlighted the fact that “Over the past 50-days, the daily average percentage move in shares of GameStop stands at 21%, compared to just 3.6% for bitcoin.” All of the attention of what was largely a left-for-dead name in the retail space has allowed Gamestop to revamp its management team.
Travis Hoium, of the Motley Fool, recently highlighted the company’s newest hires, Elliott Wilke, who will serve as Chief Growth Officer, Andrea Wolfe, who will serve as Vice President of Brand Development, and Tom Petersen, who will serve as Vice President of Merchandising.
Hoium says that Wilke’s background comes from Amazon (AMZN) where he “worked in Amazon Fresh, Prime Pantry, and Worldwide Private Brands.” He notes that Wolfe and Peterson “come from Chewy, where they held VP of Marketing and VP of Merchandising titles.” Hoium is bullish on the hires, but cautions investors to be patient, because major transitions in the retail sector do not happen overnight. Yet, he says, “But there is progress, with e-commerce sales up 309% during the nine-week holiday period ended Jan. 2, 2021.”
Regarding the recent holiday quarter, Syndee Gatewood, a 5-star Nobias rated analyst who writes for Gurufocus recently broke down GME’s Q4 earnings. She noted that the company posted earnings-per-share of $1.34 and sales of $2.12 billion. Both figures missed analyst estimates, but she noted that during the quarter, GME’s same-store sales posted 6.5% growth.
It appears as though all of the headlines associated with the volatility that this stock has experienced has driven consumers to its stores/website, because the Q4 numbers were much stronger than the full-year numbers.
For the full year, GME generated $5.09 billion in revenue, but posted a loss of $2.14/share. This negative earnings-per-share figure is what causes traditional value investors to question the validity and rational nature of the stock’s recent rally. However, the GME bulls don’t appear to be concerned with the recent past, but instead, the company’s potential moving forward.
Gatewood put a spotlight on the company’s recent eCommerce growth, saying, “GameStop also reported strong e-commerce sales, which jumped 175% during the quarter and accounted for more than a third of its revenue. For the full year, online sales grew 191%.” She also said that GME’s management recently mentioned that “the company is off to a strong start to 2021 since comparable store sales increased 23% in February as a result of strong hardware sales worldwide.”
The bull/bear tug-of-war going on with GME shares doesn’t appear to be ending anytime soon. There are staunch opinions, on both sides of the aisle here, between value investors and the wallstreetbets traders (famous for the Reddit movement which originally inspired the rally in GME shares).
Richard Saintvilus, of Nasdaq.com, recently touched upon the division between these two investor bases, saying, “GameStop has delivered declining revenue over the last four years, while posting losses for the past two years, which has surpassed $1.2 billion. Losses are expected for the next several years. But some investors are excited about what can potentially become a strong fundamental story.” He continues, “There is also enthusiasm over the arrival of Ryan Cohen, Chewy (CHWY) founder, who is charged with turning GameStop into an e-commerce powerhouse.”
Sarah Smith, of Investorplace, covered Cohen’s involvement in a recent article, highlighting his ascension from activist investor to board member, with GME’s board of directors creating a Strategic Planning and Capital Allocation Committee, of which Cohen is at the helm. Smith notes, “Investors should also note that Cohen is joined on the committee by Alan Attal and Kurt Wolf. Attal previously served as the chief financial officer at Chewy.”
It’s not yet clear exactly what Cohen plans to do to re-vitalize this company’s negative growth, but Smith says that “Moving forward, it sounds like this new committee will put into action the bold plan from Cohen to see GameStop rival Amazon (AMZN). The company press release talks of making GameStop a tech company, and of helping create value for stockholders. As Scott Deveau wrote for Bloomberg, Cohen is essentially leading a massive e-commerce shift.”
Cohen’s success at Chewy gives him a lot of credibility; however, as Saintvilus notes, a turnaround story here won’t be a walk in the park. Regarding the digital transformation that bullish investors expect to see, Saintvilus says, “That’s easier said than done, given that the brick-and-mortar retailer has yet to show financial success in the digital realm.”
Sean Williams, of The Motley Fool, recently published an article titled, “When Will AMC Entertainment and Gamestop be Profitable”, which made it clear that GME has a long and potentially rocky road ahead. Williams says, “According to Wall Street's consensus estimates from FactSet, it'll be three more years before GameStop is back in the profit column. If there is a positive here, it's that earnings before interest, taxes, depreciation, and amortization (EBITDA) is expected to be positive this year, but EBITDA isn't the same as profitability.”
Throughout the GME rally, it has been the famed wallstreetbets retail investors who’ve driven much of the bullish sentiment. However, last week, we saw Jefferies analyst, Stephanie Wissink, up her price target on GME shares from $15 to $175. Will Daniel, of Business Insider, covered her note in this piece.
Even though GME shares just missed their consensus earnings estimates, Daniel highlighted Wissink’s bullish outlook on the company, which is derived from its potential in the eCommerce space. Daniel says, “In Wissink's upside scenario, GameStop would be able to shift its "sales mix towards collectibles, accessories, and digital" while leveraging "the popularity of E-Sports to drive customers into locations."’ He notes that Wissink says, "With e-com at 30% of sales and already a $1.5B business, growing triple digits, we see a reasonable basis for $3B+ in annual sales in a 2-3 year timeframe.”
Wissink arrived at her price target by switching her evaluation from a more traditional profit based, EBIDTA multiple to a more speculative, growth oriented price-to-sales multiple. Daniel said, “Based on 3.4x sales, a 20% discount to peers, according to Wissink, GameStop could be worth $175 a share.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Yet, not all analysts are nearly as bullish. We recently saw 5-star Nobias analyst, Marty Shtrubel of Nasdaq.com, write an article highlighting a recent price target raise from Wedbush analyst, Michael Pachter. It’s true that Pachter upgraded his price target...but he went from $19 to $29, which is roughly 85% below the stock’s current share price.
So, while Pachter upgraded his price target because of a bullish outlook on the recent management changes that GME has made, he downgraded his buy/sell/hold rating from Neutral (hold) to Underperofrm (sell), heading in the opposite direction of Kissink.
Pachter concluded his analysis saying, “Our downgrade is not a reflection of our opinion of company management, which remains very high. Rather, it appears that the ‘real’ value of GameStop shares (the price willing buyers are prepared to pay in the open market) vastly exceeds the ‘fundamental’ value we believe investors expecting a financial return can reasonably expect.”
Needless to say, the debate here between those who put weight into fundamental analysis and those who’re willing to speculate on future growth is likely to rage for weeks, months, and potentially years to come. It will be interesting to see who is ultimately right in the end. But, whether or not you’re someone who has invested in GME shares, you can sit back, grab a bucket of popcorn, and enjoy the show, knowing that you’re watching a historic showdown play out in the stock market.
Disclosure: Nicholas Ward has a long position in Amazon (AMZN) but no position in Gamestop (GME). Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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