GameStop (NYSE:GME) stock has been a great trading vehicle lately. Despite the volatility, GME stock has provided huge ranges in both directions allowing traders to ride these torrential waves to large profits — if they are positioned correctly.
However, while GameStop has served as a solid trading vehicle for some and as big-time entertainment for others, that’s hardly a tasty recipe for a good investment.
Admittedly, the short interest in this name does make it interesting. But even once that gets sorted out, there’s just no way to justify a robust valuation for this business. Throw in all the Reddit news, and investors have to wonder if it’s worth the headache.
Breaking Down the Reddit Situation
So what is going on with the Reddit hoopla in the first place? In the simplest terms, we have a rogue short squeeze on our hands.
Just like when investors think a stock is going up, bulls can go long the stock. When investors think a stock is going down, bears can go short the stock. To go short though, they must borrow the shares.
Short interest is measured as a percentage, usually of the float, or the shares that are publicly traded. A high short-interest reading is usually in the 20% to 40% range. What made GME stock so interesting is that its short interest was above 100%.
How can that be?
Essentially, the shorts were betting on bankruptcy for the struggling retailer. Believe it or not, not all shorts are looking for their positions to go to zero. It could be that the stock has run too far or that it’s overvalued. In the case of GameStop though, they absolutely were looking for it to go to zero.
In that case, covering their position wasn’t a problem — that is, until GameStop didn’t go belly-up.
Fueling this realization were thousands of traders on Reddit. As the hype spread online and around trading desks, it was like sharks smelling blood in the water. GameStop obviously isn’t worth what it’s trading at now, but the recent action is all a function of short interest, short squeezes and poorly managed risk by the hedge funds.
So What Is GME Stock Worth?
That’s a hard question to answer, given the current situation that’s playing out. However, the short answer is simple: It’s not worth as much as it’s trading for.
The prior all-time high for GME stock came in 2007 in the mid-$60s. Now that all-time high sits all the way up at $483.
Shares are now down about 49% from that high, but the market is still valuing GameStop with a $17 billion market capitalization. For a retailer that’s forecast to do $5 billion in revenue for FY 2021, that’s too rich.
GameStop might not be a bankruptcy candidate, but that doesn’t make it a good business.
The company has one quarter left in this fiscal year. As it stands, analysts expect sales to slip 18.8% this year and for earnings to fall considerably. Last year, GameStop generated a profit of 22 cents per share. This year, it’s forecast to lose $2.17 a share.
For the last eight quarters, the business has had negative revenue growth and missed estimates in each of those quarters. Man, just look at the revenue decline for the past three quarters this year: -34%, -26.7% and -30.1%.
I don’t know what that looks like for everyone else, but to me it’s horrendous.
The Bottom Line
I don’t care about the Reddit forums, the news headlines or, in this case, the short interest. We’re looking for high-quality and sound businesses that have long-term opportunities due to secular growth.
Retail in general is a very hit-or-miss business. These companies are either part of the haves, or they are part of the have-nots. They either have a strong online presence, or they don’t. They either thrive with omni-channel operations — direct-to-consumer, order-and-pickup, etc. — or they don’t.
GameStop was a staple for many consumers over the years, and, for that, I hope they find a way to survive. But as an investment, the numbers just aren’t good enough.
Add in the volatility and difficulty in valuing the shares, and this one is a complete no-touch.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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