About a week ago, GameStop (NYSE:GME) made my list of stocks that deserve to go bankrupt. The only thing that’s changed is the GME stock price, which continues to fall.
GameStop has a troubled business model. The company made its bones on satisfying gamers’ need to have physical gaming discs as well as gaming consoles. But there’s no need for gamers to do that anymore, now that games are available completely online. So unless gamers are nostalgic for using old equipment and playing old games, or are devoted to having a hard copy, the company doesn’t have much of a market.
But the company is a recognizable brand. And it wasn’t simply throwing in the towel. In its last earnings report, GameStop reported that it had $600 million in cash on hand. Plus, it’s showing growth in the all-important e-commerce segment.
What’s the Plan?
GameStop is embracing esports. The company has apparently discussed the idea of forming “home grown e-leagues” in local areas. The plan would be to rely on drawing gaming enthusiasts to the store to watch events. Another idea is to redesign stores to embrace the store’s core offerings, which is retro hardware and games.
I struggle with the dichotomy. On one hand, it wants to embrace the present and future of gaming. On the other, it’s trying for a retro feel. Which is more important? I’m not sure. And I don’t think the company knows at this time either.
What is more certain is that the company is in the process of “de-densifying” their footprint. The company closed 462 stores in fiscal year 2020 and executed a share buyback in late 2020.
That doesn’t sound like a company planning a bold growth initiative. But maybe the company just found a source of funding?
Have Traders Become a Lender Of Last Resort?
Unwittingly perhaps, the takeaway from the madness that engulfed GME stock is that investors may have given the company a lifeline. Call it a cynical ploy, but the company could use the current elevation in its stock to execute a share sale.
Bloomberg reported that the company considered a share sale in the midst of the mania. However timing is everything. In this case, GameStop’s quarter and fiscal year ended on Jan. 30. When GME stock started to go nuts, the company was caught in an ethical dilemma.
The company had a responsibility to accurately disclose its financial results. As Bloomberg put it, “…you know too much about the current quarter’s earnings to sell stock without releasing them, but too little to actually release them.”
But what would happen if the company’s stock remains at elevated levels after it delivers its earnings report in late March? Alex Sirois posits that the stock should be worth around $12 or $13. It’s currently over 3x that.
Thomas Yeung wrote that the historical effects of short squeezes can last for several years. And although Yeung does forecast GME stock to be trading for under $20 by the end of 2021, he did suggest that retail traders could potentially hold its stock price between $50 and $70 for several months.
In an email to InvestorPlace, Jesus M. Salas, associate professor in the Perella Department of Finance at Lehigh University’s College of Business, echoed the sentiment and predicted an even further drop. He wrote, “Even though the stock price of GME is still relatively high, it is still highly unlikely that GME will become highly successful in the near future. This is probably not news to anybody who has been paying attention to what is going on to GME. Some investors were aware of the significant short positions in GME and so wanted to take advantage of that. Trading in anticipation of a possible short squeeze is not crazy, but it could backfire. It is very difficult to reconcile a $300 stock price for GME. The most likely scenario for GME is that it will go back to sub-$10 in the near future.”
Would they find buyers? I’m not sure, but then again nobody expected the stock to trade over $400. In this market, anything’s possible.
Stay Away From GME Stock At This Valuation
Putting aside the idea that the company could execute a secondary offering, there’s likely to be an orderly drop in GME stock. And the elevated share price takes bankruptcy off the table in the short term.
More importantly, this short squeeze buys GameStop valuable time to execute its planned pivot. It seems like a long shot, and the company has probably already received much of the lift it was going to get from new gaming consoles.
Furthermore, the seven analysts that are still rating GME stock give the stock a consensus price target of $11.93. For some context, that’s 40% lower than the stock was trading before the short squeeze.
This is a troubled company with a very narrow path to viability. At this point, it’s nearly impossible to analyze the stock in any meaningful way aside from saying it’s still way too expensive.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.
