Gamestop: Has the Game Stopped?

Gamestop (NYSE:GME) reported very good news June 9, and the stock tanked.

GameStop video game and electronics store logo sign in Bay Terrace, Queens, NY.

Source: quietbits / Shutterstock.com

An adjusted net loss of 45 cents per share was offset by a sales gain of 25%, to $1.28 billion. This came despite closing 12% of the company’s stores..

As of May 1 there was still $770.8 million of cash on the books, as the company sold new shares to engineer a turn toward e-commerce, led by former executives of Amazon.Com (NASDAQ:AMZN).

Why, then, did the shares collapse? Because the numbers don’t matter. What matters is how small traders at WallStreetBets feel, and they’re feeling ripped off. Outgoing CEO George Sherman left with stock vested at $179 million. Other executives also made out big. The new guys could also net millions, without performing, from the stock’s gains.

So far these are the game’s big winners.

GME Stock: Is the Squeeze Still On?

The price of Gamestop stock is not based on fundamentals. It’s based on a short squeeze, or the perception of one. With Gamestop adding a new shelf registration to issue new shares (which shorts can buy to cover their bets), that perception is diminishing.

According to the Twitter (NASDAQ:TWTR) account of Wallstreetbets, the most popular tickers on June 11 are AMC Entertainment Holdings (NYSE:AMC), Blackberry (NYSE:BB) and Clover Health (NASDAQ:CLOV). Gamestop is missing. This despite Igor Dusaniwsky of S3 Partners  giving the stock a “short squeeze score” of 100 out of 100. (He used to measure it as 10 out of 10, but 100 sounds bigger.)

Not all the juice has been squeezed. After falling 27% on June 10, shares bounced back in the thin pre-market trade June 11, recovering a small portion of the loss. What’s most scary to traders is a Securities and Exchange Commission (SEC) investigation of past trading activity. 

What’s keeping the shares afloat, besides money inspired by the memes, is bearish commentary, like Baird calling Gamestop worthless.  Such comments encourage shorts, and shorts encourage the squeeze.

Ryan Cohen’s Play

The practical result of the Gamestop squeeze has been to install Chewy (NYSE:CHWY) co-founder Ryan Cohen as chairman and, now, Amazon veteran Mike Furlong as CEO. Furlong wasn’t with the Amazon Web Services cloud unit. He was head of Australia operations. The new Chief Financial Officer is Mike Recupero, who had been running numbers for Amazon Prime Video.

Together, these three men are supposed to create a great, grand new business model for Gamestop, based on the Internet. So far, this has meant fixing up a warehouse in Pennsylvania to sell games and systems online.

But that’s not going to justify a market cap of $15.8 billion, which is 3 times sales at the first quarter run rate. If Gamestop could use the gamers’ cash hoard to help Amazon spin-out Twitch, its video game entertainment unit, that might be tempting. If it could use that hoard to help take Gabe Newell’s Valve public, that might also be interesting.

Trouble is, that last paragraph is pure speculation. So far as I know, no move toward cloud gaming is contemplated.

GME Stock: The Bottom Line

I never recommend shorting stocks. Even when you’re right you can be wrong.

When you short a stock you’re borrowing it, promising to buy it back. That means a hedge fund, or just a mean online gang, can bid up shares and squeeze you, without regard to fundamentals.

The game is 150 years old, but the modern model is the Herbalife (NYSE:HLF) squeeze of the last decade. I covered the story for TheStreet.  Hedge fund manager Bill Ackman publicly bet against Herbalife in late 2012. Other hedge funds then supported the stock. Ackman lost his bet.

Since the height of the squeeze, at the end of 2013, Herbalife is up 56%. But that’s less than half the advance of the average S&P stock.

On the date of publication, Dana Blankenhorn held LONG positions in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn


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