You would be hard-pressed finding analysts who would have picked GameStop (NYSE:GME) as a stock growth story. GME stock had been in freefall since the end of 2015. By August of 2020, shares had lost over 90% of their value compared to those 2015 levels.
Even 2015 was low compared to historic highs in 2008, when GME topped $60. However, as 2020 wound down, GameStop shares came to life. In January, they caught fire, doubling in value in just two sessions. At this point, GME is up over 750% since the end of last August.
What is behind GME’s sudden burst and is it sustainable?
GameStop’s Transformation
GameStop used to be able to mint money selling video games, consoles, and high-margin used video games. However, big cracks in this business model appeared when console games started going digital. Buying online and downloading a game was more convenient. That was bad enough for GameStop. Much worse, downloaded games couldn’t be brought to a store and traded in. With the profit margin on re-selling used games nearly double that of new games, GameStop was hit hard.
That kicked off a period of transformation for the company. This included a new CEO, closing of underperforming stores, and selling pre-paid cards for online game services. GameStop also shuttered ThinkGeek.com, shifting its mix of pop culture collectibles into a curated section of GameStop stores.
GME Stock Boosted by New Game Consoles
Aging game consoles contributed to GameStop’s challenges over the past year. The market for consoles was saturated, and there were only so many new gamers to buy a Playstation 4 or Xbox One. Experienced gamers were holding off on buying games and accessories until the next generation of consoles launched.
That happened last November. The Xbox Series X/S and Playstation 5 are good news for GameStop. Gamers are snapping up the new consoles and will be for years to come — that’s the way the game console cycle works. In addition, they’re buying games and accessories for the new consoles.
It’s no coincidence that GME stock started coming to life last fall as anticipation for the new hardware built.
GameStop’s holiday quarter was a mixed bag, but with a positive note. The company reported total sales down 3.1% year-over-year. That was blamed on physical store closures due to the pandemic. However, its e-commerce sales were up 309%. Next-gen game consoles were in limited supply over the holidays. There were also limited games optimized for the new hardware.
All three of those factors — temporary store closures, new console shortages, and a lack of games for the next-gen consoles — are expected to be addressed in 2021. The first quarter where those new consoles are readily available is going to show a YoY sales gain that could goose GME stock even further.
GME Rockets on New Board Appointments
GameStop shares really took off days after the holiday sales numbers were reported. On Jan. 11, the company announced three new board members.
Activist investor Ryan Cohen was joined by two new directors. Cohen was the co-founder of high successful online pet supply company Chewy Inc (NYSE:CHWY); the other two new directors were Chewy executives. The three bring considerable e-commerce and technology experience that GameStop is counting on to “accelerate transformation.”
The market was more than pleased with the announcement. GME stock surged, gaining 100% in just two days. If these three can help steer GameStop toward Chewy-level online success, that enthusiasm may well be warranted.
Bottom Line on GME Stock
The future looks much brighter for GameStop than it did just six months ago. However, shares in the company have likely gained too much, too fast. 750% growth in under six months? Beyond common sense, there are warning signs that GME stock is over-heated.
Checking in with CNN Money, the eight financial analysts polled have GameStop rated as a hold. More tellingly, their median 12-month price target of $12.50 has nearly 70% downside. Even the most bullish among the group has a $22 price target — 47% downside.
Short seller Citroen Research has been very publicly predicting GameStop shares will soon be back to the $20 level.
There’s no doubt that GameStop is in a stronger position with its new board members. Their experience in e-commerce is a valuable addition to the company’s governance. Even though holiday quarter sales were disappointing, there was an encouraging increase in sales on the company’s e-commerce platform. The launch of next-gen game consoles — plus an uptick in interest in video games in general — bode well, at least for the short term.
Caution is called for at this point, though. With the continued move to digital game sales, questions do remain about whether GME stock can continue to maintain this valuation in the long term.
On the date of publication, Louis Navellier had a long position in CHWY. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
