GameStop (NYSE:GME) stock is trading at slightly under $174 each. That’s a little more than half its January “meme stock” high. It’s also almost 10x more than it was trading for a few months before that.
For a retailer, the valuation is ridiculous. It’s a market cap of $13.3 billion for a company that may have sales of $5.5 billion in 2021. Most retailers sell at a discount to sales because margins are so thin.
As to margins, at GameStop there are none. The company is expected to lose about $1 per share this year. Its single analyst at Tipranks still wants you to sell it, with a price target of $50. In general the analysts have thrown up their hands, left the red light on, and told those who hold the stock “good luck.”
The Hope for GME stock
There is hope.
For one thing Christmas is coming. Christmas is always great for retailers, especially those in gaming. GameStop is expected to earn $1.06 per share during the current quarter. The stores are already staffing up for a surge of business.
Then there’s Ryan Cohen. The meme stock run made Cohen, now GameStop chairman, a billionaire. So far, he has overseen a new offer of stock, hired a new CEO from Amazon (NASDAQ:AMZN) and promised to broaden the GameStop site’s offerings.
The website itself shows little of that, other than refurbished iPhones, Facebook (NASDAQ:FB) Oculus glasses, and merchandise like shirts and hats. There’s a credit card and a trade-in marketplace. But players aren’t playing on the site, and there’s no indication from the company of when that might happen.
Gaming Is Changing
The problem for GameStop all along has been that gaming is changing, and GameStop isn’t changing with it.
The new game involves heavy use of cloud resources, like Amazon’s Twitch. In cloud gaming, the action is all online. It’s social. It’s also competitive, with retailers like Five Below (NASDAQ:FIVE) opening esports centers, turning gaming into a spectator sport.
The meme stock mania, and the willingness of investors to stick with GameStop stock, give Cohen and CEO Matt Furlong time to enter these games. GameStop’s third quarter earnings are due Dec. 8, with a loss of 22 cents per share and revenue of $1.18 billion expected. That’s easily achieved. Stability is here.
Meanwhile, Wall Street is still trying to figure out what happened. A staff report from the Securities and Exchange Commission broke the myth of a short squeeze. People bought GameStop stock because they believed new GameStop management would lead to GameStop gains.
Robinhood (NASDAQ:HOOD), the broker through which most of the action occurred, was as blindsided as anyone. They saw a tidal wave of volume and volatility, requiring it to raise$3.4 billion in capital to handle the demand of GME stock trades.
The Bottom Line
In the end, there was a happy ending. Robinhood dealt with the frenzy. GameStop stock came down off its highs but has maintained its value, even as trading volume has plunged to under 1.5 million shares a day.
The question now is what Cohen and Furlong will do with this opportunity, and how much time investors will give them. Analysts don’t want to guess. As our David Moadel notes, no one wants to get in the way of the “apes,” the social media traders holding up the stock.
For now, the apes are standing strong. No one on Wall Street wants to argue with them. But no one in Wall Street wants to admit the apes were right, either.
Could it be that the apes are just young, patient investors willing to wait for a return? Tune in after Christmas to find out.
On the date of publication, Dana Blankenhorn held a long position 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 and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
