GameStop (NYSE:GME) has been on a tear so far this year, and the company quite smartly took advantage of this. It just raised $1.126 billion at $225.20 selling 5 million shares, before expenses on June 22. As a result, there is very little chance GME stock is going to fall much further, especially if it starts booking profits.
This coincides with what I wrote on May 25 about GME stock. At the time it was trading at $209.43 and I wrote that it was too high, even if its first-quarter results turn out well. And GameStop did post good numbers, albeit without profits.
But GameStop also had $770.8 million in cash and restricted cash. So now, with the $1.126 billion, the company now has $1.897 billion, before expenses. That happens to equal 15% of its $12.57 billion market capitalization as of Friday’s close.
This also means the company is not going to wither away. In fact, I don’t think GME stock likely to fall much further. Here’s why.
GameStop’s Market Valuation
GameStop made sales of $1.277 in Q1, up 25%. This gives it an annual run rate of over $5.1 billion. In fact, analysts now estimate that its 2022 (January) revenue will be $5.57 billion and by 2024 it will be $5.74 billion. This means that GME stock trades for 2.26 times this year’s forecast revenue and just 2.19 times 2024 estimates.
In fact, it’s actually cheaper than that. If we deduct the $1.9 billion in cash, the net market cap is just $10.67 billion. That effectively lowers its value metrics. The new price-to-sales (P/S) ratio is just 1.92 times 2022 revenue and just 1.86 times 2024’s expected revenue.
A number of its store peers, like Best Buy (NYSE:BBY) and Conn’s (NASDAQ:CONN), trade for roughly 50% of forward-year sales. They don’t sell too much online, although that part is growing. Costco (NASDAQ:COST) is at about 1 times this year’s sales, and it does not do much online.
But consider this. Online-only consumer stocks trade at much higher multiples. Amazon (NASDAQ:AMZN) trades for 3.68 2021 sales and 3.1 times 2022. Even eBay (NASDAQ:EBAY) trades at a 3.9 times multiple of 2021 sales and 3.6 times 2022 sales. And don’t even think about Shopify (NYSE:SHOP). It trades for 40 times this years’ sales 30 times next year.
GameStop’s Store Strategy
So, you can sort of see what the market is doing with GameStop. It trades between the “mostly store” sales type of consumer stock and the online stocks. The market is giving GameStop the benefit of the doubt that it will move to more online sales channels.
This is despite the fact that GameStop still has “thousands” of stores. The company is getting coy about this, not releasing the total number of stores it has left open.
But now GameStop is “de-densifying,” as it calls it, having reduced by “nearly 12%” its total store count during Q1. This was approximately 118 stores, according to page 16 of its latest 10-Q. This implies the company now has about 983 or so stores (i.e., 118 is 12% of 1,101 stores).
What GME Stock Is Worth
So, for comparison purposes, let’s say that GameStop can get to the point where more than 50% of its sales are online, not needing physical stores. The market might be willing to set its value at the midpoint between mostly stores (0.5 P/S) and online-only (3.5 P/S). That would mean giving it a value of 2 times forward sales, plus its cash.
So, assuming multiplying its 2021 forecast sales of $5.57 billion times 2, or $11.14 billion, plus $1.9 billion in cash, gives it a value of $13.04 billion. That is 3.71% higher than Friday’s close, implying GME stock is worth $175.31 (i.e., 1.0371 x $169.04).
And with $5.72 billion in sales forecast for 2024, the value is $11.44 billion, plus $1.9 billion, or $13.34 billion, or 6.1% higher. This puts its price at $179.35, two years out.
In other words, GME stock is reasonably fairly valued right now, worth just 3% to 6% more, between $175 and $179. That means it is not likely to fall much further. If sales outdo expectations, GME stock could rise.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
