As this year comes to an end, arguments about whether to buy or sell highflying meme stock GameStop haven’t changed. It’s still a question of belief in what the videogame retailer could become versus what it currently is. But trying to quantify the former results in a stock that is worth a fraction of what it is now, according to one analyst.
GameStop (ticker: GME), the original meme stock, has been one of the best performers this year. Its shares have gained 707% to $152.14 in 2021, easily outpacing the S&P 500’s 26% rise and the Dow Jones Industrial Average’s 17% gain.
But the rise hasn’t been driven by how its business is doing. Instead, it became a favorite on social-media platform Reddit, to the point that it “no longer trades on traditional fundamental valuations or metrics, but on retail investors’ sentiment, hope, momentum, and the powers of crowds,” writes Ascendiant analyst Edward Woo.
That adds to the risks for anyone who might think about shorting the company—remember, shares were trading over $300 as recently as June—but the fundamentals clearly point to weaker returns going ahead, Woo writes. Losses are still large, while sales of software declined 2% year over year during the most recent quarter as purchases continued to transition away from physical disks to downloads. The company hasn’t provided guidance.
GameStop does, however, have a couple of things going for it. The first is its chairman, Ryan Cohen, who had success with Chewy (CHWY) and has brought in new management to help point the retailer in a new direction. It also has a lot of cash, about $1.4 billion, according to Woo, after selling a bunch of stock. That makes GameStop more like a venture capital investment, one that could branch out into non-fungible tokens, cryptocurrencies, or other businesses. But it’s also a very risky investment. As a result, Woo lowered his target on the stock to $23 from $24 on Monday, down 85% from this past Thursday’s close. The analyst has a Sell rating on the shares.
“We acknowledge Mr. Cohen’s success and talents and the large cash GameStop now has greatly [increased] the odds that it can pivot to be a successful e-commerce company,” Woo writes. “However, we are still very early in its transformation and investors are likely facing a very high risk/rewards scenario.”
Not like that has ever stopped anyone.
Write to Ben Levisohn at [email protected]
