GME With Nobias Technology: Case Study on GameStop the first Meme stock
GameStop (GME) shares have been at the center of the recent “meme stock” craze that we’ve seen develop during recent years. GME shares have experienced massive volatility as traders buy and sell the stock using thesis that are largely based upon sentiment as opposed to the company’s underlying fundamentals. Today, GME shares trade for $146.19, which means that they are down roughly 57.5% from their 52-week high of $344.66. However, during the last month, GME shares have rallied more than 40%, showing that the volatility that they’ve become known for since 2020 remains in place.
One of the strongest aspects of the bullish thesis for GME shares is the strength of its new leadership. Ryan Cohen is the chairman of GameStop’s Board of Directors and his involvement with the company fuels the bulls’ hopes.
Kevin Dowd, a Nobias 4-star rated author, recently published an article at Forbes which put a spotlight on Cohen and his very successful career. Dowd highlighted Cohen’s history, which began when he co-founded Chewy, a pet-oriented eCommerce site, in 2011, and eventually oversaw that company’s sale to PetSmart in 2017 for $3.35 billion. Later, Chewy IPOed as a stand alone company and during the pandemic period where eCommerce/stay-at-home stocks were all the rage, the company’s market cap soared to more than $50 billion.
GME April 2022
At this point in time, Cohen was minted as a market darling - creating a sense amongst investors that anything he touches, turns to gold. Dowd touched upon Cohen’s plans to take advantage of this sentiment, by investing his billions into other broken down retail plays. One such investment was GameStop. Cohen’s involvement with that company stoked the meme-stock mania that we’ve seen attached to GME shares.
Regarding Cohen’s GME sage, Dowd wrote: “A few months later, Cohen divulged a roughly 10% stake in GameStop, a development the company’s backers greeted with enthusiasm—enthusiasm that helped launch one of the strangest sagas in finance history. The company’s stock soared after Cohen revealed his stake, and it continued to soar to in the months to come, as an informal armada of day-traders and other opportunists attempted a short squeeze that drove the share price up to gob-smacking levels and prompted a cascade of think-pieces pondering whether Wall Street would ever be the same. In April, Cohen was named GameStop’s chairman.
The short squeeze hasn’t quite worked—not yet, at least, not in the way the true believers expected. But the whole affair has been transformative for GameStop. The company’s stock spent most of 2020 trading for less than $10 per share. Today’s it’s above $100, giving GameStop a $7.7 billion market cap and providing the financial firepower required for Cohen & Co. to attempt an ambitious digital transformation.”
The fact that Cohen, and other high level insiders, continue to accumulate GME shares bolsters the bull thesis surrounding this stock. Ed Lin, a Nobias 4-star rated author, recently published an article at Barron’s highlighting recent insider purchases at GameStop. He said, “GameStop (ticker: GME) just saw its third insider stock purchase in as many days, and shares of the videogame retailer soared last week on news of the big buys.”
Lin continued, “GameStop director Alan Attal paid $195,000 on March 24 for 1,500 shares, an average price of $129.91 each, according to a form he filed with the Securities and Exchange Commission that day. Attal, a GameStop director since January 2021, now owns 130,423 GameStop shares.”
Finally, he added, “The other insider GameStop stock buys in recent days—bigger than Attal’s purchase—have been made by Cohen, and director Larry Cheng. Those stock purchases were disclosed on March 22 and 23, respectively. These insider purchases have likely factored into the recent 40% rally that GME shares have experienced.
The company’s recent Q4 report could also be factoring into the rally. When GME reported earnings on March 17th, 2022, the company beat Wall Street estimates on the top-line but missed consensus estimates on the bottom-line. GME posted sales of $2.25 billion, which were up by 6.1% on a year-over-year basis. GME’s non-GAAP earnings-per-share totaled -$1.86, missing estimates by $2.70/share. In other words, Wall Street was expecting a profit during Q4, but GME published a loss.
John Miller, a Nobias 5-star rated author published an article on GameStop, highlighting its recent quarterly results, on Seeking Alpha on March 22, 2022. In his piece, Miller touched upon GameStop’s strong holiday gaming sales, noting a quote by the company’s CEO, Matt Furlong from the Q4 report. Furlong said, “We have learned from the mistakes of the past decade when GameStop failed to adapt to the future of gaming... We've also had to change the way we assess revenue opportunities by starting to embrace, rather than run from, the new frontiers of gaming.”
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.
As great as the growth in gaming was, Miller was quick to point out that GameStop’s valuation remains very speculative. He highlighted the company’s recent fundamentals saying:
Revenue growth in 2021 was about 18% and one could legitimately argue a large part of the growth came from the reversal of Covid effects felt in 2020. Setting this aside, assume revenue growth of 35% to $8.1 billion.
The gross profit percentage in 2021 was 22%, though the trend in the second half of the year was down, primarily on added shipping costs assumed by the company.
SG&A for 2021 was up 13% to $1.7 billion.
Looking forward, Miller used these 2021 figures to formulate a theoretical valuation scenario for the shares, using a 35% revenue growth rate, 22% gross profit margin, and $1.7 billion in SG&A for 2022. He concluded, “The result of these assumptions is $100 million of hypothetical earnings. So, even if the $1.27 billion cash balance were backed out of the $6.9 billion market cap, the price to EBIT multiple would remain above 50. GameStop is substantially overpriced even under the most optimistic of near-term outlooks.”
When looking at the aggregate opinion expressed by the credible authors and Wall Street analysts (only those with 4 or 5-star Nobais ratings) that our algorithm tracks, it appears that the valuation issues surrounding GME shares result in stark pessimism regarding the stock’s prospects. 66% of recent articles published about the stock by credible authors have expressed “Bearish” sentiment. And, the average price target being applied to GME shares by credible analysts that we track is currently $30.00/share. Right now, GME shares trade for $146.19. Therefore, this average price target implies downside potential of nearly 80%.
Disclosure: Nicholas Ward has no GME position. 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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