After slumping for the better part of five years, shares of video game retailer GameStop slid below $3 last March, just as the country was shutting down to cope with the onslaught of the coronavirus. But then, as if by magic and at what was arguably the worst possible time, sentiment in this beleaguered brick-and-mortar retailer reversed.
Where once the company’s performance and prospects resembled a southbound funeral procession, GameStop had just been given a free game, a second chance, that was going to take it on the ride of a lifetime.
If you haven’t heard or haven’t been following along, the past eight months have seen GME go from $3 to $380, delivering investors on the right side of the trade more than a 12,000% return.
For those who had been “booing from the sidelines” and rooting for GameStop’s demise (e.g., short sellers, or those betting that a stock will decline), the past few months have been costly and embarrassing.
Wedbush Analyst Michael Pachter, who has covered GameStop for years and, as of Jan. 11, rated the stock neutral with a $16 price target, told Yahoo! Finance that he was as mystified as everyone else.
“It means nothing for the company,” Pachter said. “I mean, I guess it’s fun to be a cult stock and it’s fun to have a lot of people talking about you, but they’re not going to do anything differently because their share price went way up, other than perhaps issue a little bit of equity and pay down some debt.”
What’s In Store
If you look at GameStop’s most recent earnings report, the Texas-based retailer said sales at its 5,000 stores rose 4.8 percent during the holidays, while its eCommerce sales rose 309 percent, but still only accounted for one-third of its total revenue.
Although the pandemic hurt foot traffic and local shutdowns didn’t help matters, the fact remains that a lot of video game consumers still like to go into a store and purchase a physical disc copy of a game, even though they could acquire the same thing digitally through the console at home.
There’s also the reality that GameStop, as the largest player in the space, serves as the defacto market-maker in the secondhand video game segment. It’s a niche that analysts, including Pachter, say will remain an important and viable component of the business for at least five more years, or until the device makers no longer include optical disc readers in their next-generation consoles.
The Short Squeeze
It’s no secret that the fuel driving GameStop is coming from a Reddit investor chatroom called WallStreetBets, whose members’ collective and coordinated buying of the stock has driven it higher and higher, triggering a so-called short squeeze along the way.
Wall Street veterans, who have seen plenty of short squeezes in their day, will tell you that it is no more advisable to jump on a moving train than it is to try to catch a falling knife — meaning there is no real investment case at work, and what’s happening in the markets is pure speculation.
“The euphoria of WallStreetBets on Reddit doesn’t impact earnings unless all those people go in and buy games at GameStop, so I don’t think it makes much difference at all,” Pachter concluded.
For its part, GameStop’s Jan. 11 press release discussed the rejiggering of its board, but made no mention of the fact that the company’s soaring stock price had increased its market value to more than $23 billion — which is greater than Macy’s, Gap, Kohl’s and Nordstrom combined.
“GameStop is in a solid market position with substantial room to run,” said CEO George Sherman. “We are leveraging our omnichannel capabilities, increasing our eCommerce sales and demonstrating our unique ability to serve our customers wherever, whenever and however they choose to shop and experience gaming.”
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