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Gamestop Is Still Overvalued, But Its Fundamentals Are Improving

Gamestop (NYSE:GME) stock continues to trade above $100. That’s an amazing fact, given that shares were a tenth of that not long ago. In January, when GME stock soared for the first time, it appeared to be a passing fad. However, with Gamestop remaining in triple-digit territory much longer this time, people are waking up to the fact that it’s fundamental outlook has improved.

GameStop video game and electronics store logo sign in Bay Terrace, Queens, NY.
Source: quietbits / Shutterstock.com

Now, let’s be clear: is GME stock actually worth the $159 or so it trades for today? Probably not. However, the company’s board of directors is making all the right moves to eventually justify such a high share price.

That is to say, while GME stock is hardly a compelling investment right now, it is moving well beyond the initial “meme” stage of its comeback story.

GME Stock: A New CEO and Direction

Earlier this week, Reuters reported that Gamestop is looking for a new CEO to replace George Sherman. Sherman presided over Gamestop during a difficult period for the company, in which its sales and profits decreased substantially. Moreover, Sherman’s expertise in brick-and-mortar retail would carry less weight for a future Gamestop that is more focused on e-commerce.

Activist investor Ryan Cohen has been pushing for this kind of revitalization. Now he’ll get his way. Given Cohen’s success at Chewy (NYSE:CHWY), investors are giving him the benefit of the doubt. If Cohen can pull off a similar achievement at Gamestop, the company may very well eventually grow into the $11 billion market capitalization GME stock has today.

On Monday, a Fox Business reporter also tweeted that Gamestop is making an interesting new hire. According to the reporter, the company is looking to hire in the area of non-fungible tokens (NFTs) and blockchain. It’s unclear what role this might have within the future business. However, video games certainly seem like one of the more logical places to deploy NFTs and digital currencies.

Pros and Cons of the Stock Offering

There’s another development with GME, though: Gamestop’s new CEO will also have a lot more money to work with. Recently, after months of speculation, the company finally announced a new public stock offering. It intends to sell 3.5 million of shares via an at-the-money (ATM) offering which should raise close to half a billion dollars.

The stock offering comes with clear positives and negatives for GME stock. On the one hand, it pretty much wipes out the short-squeeze thesis. Up until now, in theory, Gamestop stock could rise even more if Reddit accumulated the overwhelming amount of outstanding shares. Since shares were in limited quantity, it was possible to theoretically corner the market.

Now, though, Gamestop’s management will simply print up more shares as appropriate. Thus, even if the subreddit r/WallStreetBets keeps adding to its aggregate stake in the company, it won’t necessarily be able to force short sellers to cover. The mechanism for an “infinity squeeze” is disarmed now.

That said, assuming you want Gamestop to survive as an operating business, this is a great move on management’s part. Up until last year, the company was in such financial distress that it was having to sell off its corporate jet, office buildings and other assorted assets to have enough capital to keep its stores stocked with inventory. In all likelihood, Gamestop would have eventually gone bankrupt if not for r/WallStreetBets.

Now, however, it will be flush with tons of money raised from the offering. This will keep Gamestop in business for years to come. It also gives the company ready capital to invest as it attempts to pivot from its shrinking physical business to some sort of e-commerce platform.

GME Stock Verdict

Last month, I suggested selling Gamestop July $20 naked puts as a clever way to profit from its inflated volatility. Since that article, these puts have dropped from $2 to 65 cents, thus offering a 67% gain on that trade so far.

The trade is working because the thesis is playing out. GME stock likely isn’t going up any further, at least not in the near term. However, people betting on an imminent crash also badly missed the mark. Gamestop isn’t going to collapse back to $25 or whatever overnight. Rather, shares should continue to gently slide back to some new higher support level, perhaps in the $60 to $80 range.

Particularly with the new stock offering, Gamestop is a far different investment proposition than it was pre-2021. Now, it will have plenty of cash in its war chest, giving it the ability to play the long game as it transitions its business model. With a new CEO on the way, this stock should find support at a much higher share price than it was at pre-2021.

On the date of publication, Ian Bezek held a bullish position in GME stock via July $20 strike GME naked puts. He held no direct position in GME common stock.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2021/04/gme-stock-still-overvalued-but-fundamentals-are-improving/.

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