Gamestop (NYSE:GME) stock was one of the great stories of early 2021.
A short squeeze driven by small investors sent stock in the video game store chain soaring early last year, from $25/share to a high of over $300. The arrival of Chewy (NYSE:CHWY) founder Ryan Cohen as chairman, and the hiring of new management from Amazon.Com (NASDAQ:AMZN) caused many of those investors to believe a turnaround was imminent.
It’s not. When the company’s Christmas quarter numbers came out in March, it reported anemic growth of 6% year-over-year, and a loss of $381 million, $5.25 per share. Beyond a stock split that only seems to benefit management, nothing has changed.
The Bull Case for GME Stock
The bull case for Gamestop starts with a failure, cloud gaming.
Alphabet (NASDAQ:GOOG, GOOGL) promised to transform the industry with its Google Stadia, but it’s looking increasingly like just another app store. There’s too much latency, too much time between you mashing a button and your opponent across town being able to respond. Even in the U.S., which has half the world’s cloud data centers, local networks are slow and expensive.
This means there’s still a niche for retailers who sell physical games and game machines. Gamestop fills that niche. But the niche should decline over time. Cloud gaming is coming.
No one wants to bet against Gamestop, however, or especially short it, given what happened to Melvin Capital, which led the shorts last year. Even today, shorts are in an uncomfortable position as retail investors continue to support the stock.
The Bear Case for GME Stock
The question is, why?
Cohen has turned his attention to Bed, Bath & Beyond (NASDAQ:BBBY), the home goods retailer. After taking a position in the stock, he convinced the board to seek a sale, first of its Buy Buy Baby unit, then possibly the whole company. He turned into just the kind of Wall Street shark he once criticized, taking out companies to take them apart.
What of Matt Furlong, the hotshot Amazon executive hired as CEO? He made $16.7 million for a half-year of work, but he has done nothing to improve operations. Since dropping chief operating officer Jenna Owens late last year, the only release Gamestop has sent out about operations concerns a token for NFTs.
Bulls talk about insiders buying, about the stock split and about Gamestop having “meme stock power.” What does the last even mean? It seems to mean that the small investors who bought the meme aren’t abandoning the name. But that’s not a business case.
Professional analysts have given up on Gamestop. Tipranks lists just one, who wants you to sell it. Their price target is $30/share, 75% below where it’s trading on May 3.
The Bottom Line
There are very few retailers that sell at a premium to their sales. Costco Wholesale (NASDAQ:COST) does and so does Target (NYSE:TGT). Walmart (NYSE:WMT) sells for about 73% of sales, and Home Depot (NYSE:HD) for about 40% of sales.
Gamestop is losing money and sells for 1.5 times its sales. The valuation makes no sense. Full year sales in fiscal 2022, which ended in January, were 20% ahead of a year before. But they were also $450 million behind where they were in the pre-pandemic year of 2020.
When there are so many good stocks selling at deep discounts to the value of their businesses, Gamestop stands out. Not in a good way. Its priced way above other retailers, and it’s not a tech stock, even though it sells software and chip-laden game machines.
My advice is that you walk away. Do it quietly. Don’t tell anyone until you’re out. But sell, now. If you got in early, take your winnings. If you got in late, accept your losses. But sell.
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