GameStop investors are on fire again
This is the third time this year that investors have lost billions in a matter of days. Anyone who bought the shares and held them in the past 10 trading days is now underwater, some of them over $ 100 a share.
Colin Sebastian, senior research analyst at Baird, has a speculative risk neutral rating (equivalent to Hold) with a price target of $ 25. He wrote in his earnings summary note: “As GameStop’s board continues to mix up the management game, the goal of transforming into a ‘tech’ company that thrills gamers remains largely a mystery, d. ‘especially since the video game industry is accelerating the transition to downloads, streaming and cloud services. There’s no question that the console’s transition period provides a lifeline, but games aren’t dog food, and investors deserve more than memes to gauge a fundamental long-term outlook for a company. business.
It’s a smart move on the part of the company, for the company
In April, GameStop sold 3.5 million shares, raising $ 551.7 million for an average of about $ 158 per share. This allowed it to buy back $ 216.4 million in 10% debt, which allowed the company to have no long-term debt.
If the company can sell 5 million shares at the current price of $ 220, it will raise around $ 1.1 billion. Combining this with the $ 771 million in cash the company currently has will give it the financial flexibility to pursue new initiatives over a period of several years. However, it will take years, not months or quarters, to fundamentally change the business and its bottom line.
First quarter results are better than expected
Even though it was an easy comparison to the first fiscal quarter impacted by Covid-19 last year, the company did even better than expected.
- Revenue of $ 1.28 billion, up 25% year-on-year and above consensus estimate of $ 1.16 billion
- Hardware grew 37% year-on-year and accounted for 55% of sales
- Collectibles grew 93% year-on-year
- The gross margin of 25.9% was a little ahead of the consensus of 25.7%
- Loss of pro forma EPS of $ 0.45 vs. expected loss of $ 0.82
While the company hasn’t provided any guidance, analysts are likely raising their estimates for the remainder of this year and next. However, the valuation of the title is still very extensive.
Selling stocks won’t create much dilution
Shares of GameStop are up 1,070% year-to-date to $ 220.39. If the company were to sell the 5 million shares and raise $ 1.1 billion at the current price, that would only dilute existing shareholders by 7%.
But valuation numbers don’t make sense
Before Covid-19 derailed the US and global economies, GameStop was slowly losing revenue from fiscal year 2016 to 2018, then saw a sharp decline in fiscal year 2019 (ended January 2020). GameStop may be able to shake up its business enough to recoup at least some of the slowdown, but that won’t happen overnight.
- Revenue for fiscal year 2016: $ 8.6 billion
- Fiscal 2017 revenue: $ 8.5 billion
- Fiscal 2018 revenue: $ 8.3 billion
- Fiscal 2019 revenue: $ 6.5 billion
- Fiscal 2020 revenue: $ 5.1 billion
- Fiscal year 2021 revenue: $ 5.45 billion estimated
- Fiscal year 2022 revenue: estimate of $ 5.31 billion
Note that while GameStop’s exercise ended on January 30, 2021 and would normally be titled Fiscal Year 2021, GameStop calls it Fiscal Year 2020.
When calculating the company’s valuation metrics, these results use the $ 8.3 billion in fiscal 2018 revenue to be as generous as possible.
- At Thursday’s close of $ 220.39
- Market capitalization of $ 15.8 billion
- 12.4 times greater than the December 31, 2020 market capitalization of $ 1.3 billion
- Market capitalization of 1.9x compared to revenues for fiscal 2018
- vs 0.15x at December 31, 2020
Using the $ 5.31 billion revenue in fiscal 2023 makes the valuation numbers even worse. It reaches a market cap of 2.9x relative to earnings, which is 52% more.
Due to GameStop’s huge stock spike and resulting bubble valuation metrics, it makes perfect sense for the company to sell stocks at inflated prices and put themselves on a more solid financial footing.
Surprisingly, analysts are bullish on stocks
Yahoo! Finances have 12 sell-side analyst ratings on stocks with an average price target of $ 62.25, although the company lost $ 1.02 per share in fiscal 2022 (ending February of next year) and $ 0.59 per share in during fiscal year 2023.
- 2 strong purchases
- 2 purchases
- 7 sockets
- 1 Underperforming
Seems like the strong buys and probably the buy odds are “flawed”. I find it hard to believe that given the price and valuation levels of stocks, a short-side analyst has a buy rating, let alone a strong buy rating.
Stocks have been extremely volatile
According to GameStop’s filing with the SEC for its stocks offering one of the included risk factors, “For example, on January 28, 2021, our common stocks experienced an intraday high of $ 483.00 per share and a low of $ 112.25 per share. In addition, from January 11, 2021 to June 8, 2021, the closing price of our common shares on the New York Stock Exchange ranged from $ 19.94 to $ 347.51 and the daily trading volume ranged from approximately 1,790,000. to 197,200,000 shares. During this period, we have not undergone any material change in our financial condition or our operating results that would explain such price volatility or such volume of transactions. These large market fluctuations can adversely affect the price of our common shares. ”
Note how the company pointed out that there were no significant changes in the finances or operations of the company during these periods.