GameStop stock forecast: will the market bonanza last?
11:00, 29 January 2021
Updated – 26.02.2021
In a matter of days, video game retailer GameStop (GME) has become the US stock market’s sensation. The company’s market capitalisation soared 700 per cent, rising from $3bn on January 21 to more than $24bn on January 27. Retail investors rushed to buy shares, leading to many trading platforms, such as Trading 212, having technical issues and glitches as they struggled to cope with growing demand.
As the rally continued, several retail brokers placed restrictions on the stock’s trading. These included Robinhood, Interactive Brokers, Webull and TD Ameritrade, a broker that was recently acquired by Charles Schwab Corporation for $22bn.
The stock remains incredibly volatile. After opening at $482 per share on January 28, it took a dip to $153 per share and hiked to $250 per share in a few hours. The GME share price had then dropped as low as $38.50 by February 19, only to soar to an intraday high of $185 on February 25 and close the trading session at $108.73.
Watching market frenzy from the sidelines, many now wonder: why is GameStop stock going up? Will it continue rising, and, if not, how long will it take for the shares to plunge and wipe newly-added billions off the company's value?
To answer these questions, this article covers all the information you need to know about the business and its financial health, as well as the latest GameStop shares performance, expert commentary and analysts’ outlook for the stock.
GameStop: not your typical Wall Street success story
GameStop is a US-based video game, consumer electronics and gaming merchandise seller that operates retail stores in the US, Canada, New Zealand, Australia and Europe.
It is no secret that the market for physical game media has been struggling ever since online services that offer downloadable digital versions of games emerged. Already in the second half of the 2010s, GameStop, whose business was long rooted in new and pre-owned software, started feeling the pressure of the changing environment.
The company’s financial health has been on a decline for years. In fiscal 2018, the business reported a record-breaking net loss of $673m.
2020 was not an easy year for the business, either. The Covid-19 crisis saw GameStop closing its bricks-and-mortar stores. However, the company continued with online and curbside sales, which helped to partially offset the damage brought by the pandemic.
On December 8, 2020, the retailer reported its Q3 earnings. While analysts were expecting the business to post revenue of $1.09bn, it generated only $1bn, a 30 per cent year-over-year drop. GameStop finished the quarter with $602.6m in cash and $269.5m in short-term and $216m in long-term debts.
Here is what the company’s financial results for the first three quarters of fiscal 2020 looked like:
On January 11, it reported revenues for the nine-week holiday period ended January 2, 2021. The statement showed a 309 per cent increase in e-commerce sales and a 4.8 per cent growth in comparable-store sales.
The company’s chief executive officer, George Sherman, commented on the results: “GameStop maintained its status as the omnichannel destination for gaming and entertainment with unprecedented demand for new gaming consoles and a significant increase in e-commerce sales.”
Regardless, total sales still came in at a shy $1.77bn, 3.2 per cent lower compared to 2019’s $1.83bn and 33 per cent down from 2018’s $2.63bn, due to “store closures under the company’s planned de-densification strategy, temporary store closures mandated by local governments due to Covid-19, and industry-wide limited supply of new gaming consoles, and supply chain constraints broadly”.
Sherman remains positive about the company’s prospect for this year: “Demand for the new generation of consoles remains very strong, and as a result, we anticipate the consumer’s excitement for the new console technology will benefit us going forward well through 2021. Overall, we remain confident in both the positive growth aspects for 2021 driven by our strategy to add new and exciting product revenue streams across all things games and entertainment and the strong demand for the new generation for console-based video game products.
GameStop is set to report its Q4 and full fiscal year 2020 results in March.
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GameStop stock analysis: the Great Reddit Battle
GameStop shares had been falling since 2015, bottoming out in March 2020 during the broader market selloff caused by the Covid-19 pandemic. At that time, the stock dropped to $2.57 per share.
After plunging to this multi-year low, GameStop’s stock made steady gains and crossed the $15 mark at the end of November 2020. However, the shares dropped lower later in December after the company posted its disappointing Q3 earnings.
Things took an unexpected turn this month, with GameStop stock news taking all financial headlines by storm. The company's share price skyrocketed over the course of several days, reaching an all-time intraday high of $482.85 on January 28, a growth of more than 2,440 per cent year-to-date.
The hike was fuelled by retail investors running to buy the GME shares, as well as those in AMC Entertainment (AMC), BlackBerry (BB) and Bed Bath & Beyond (BBBY), spurred by Reddit’s community WallStreetBets.
It all started when one investor began actively promoting GameStop on Reddit, a famous social platform, suggesting users team up to short squeeze the company’s stock. Smaller investors picked up on the idea, banding together and encouraging others to support the nascent rally in the share price.
As GME’s gains grew, Wall Street’s big players, who went short on the stock, faced billions of dollars in collective losses and had to buy shares to get out of their losing positions. According to S3 Partners, by January 26, GameStop’s short sellers had already lost more than $5bn in 2021.
On Wednesday, online broker TD Ameritrade restricted trading in GameStop, as well as several other stocks. A few other big trading platforms quickly followed the example, sending GME shares plummeting.
These actions unleashed a storm of criticism, and the brokers were accused of attempting to protect the interests of Wall Street at the expense of smaller retail investors.
Jake Chervinsky, a general counsel at fintech company Compound Labs, tweeted: "Robin Hood: a parable about stealing from the rich to give to the poor. Robinhood: an app about protecting the rich from being short squeezed by the poor."
The House representatives Alexandria Ocasio-Cortez and Ro Khanna also called Robinhood’s restrictions unfair for individual investors.
On January 29, the stock ended the trading day changing hands at $325 per share. However, after enjoying its historical highs for mere days, GME plummeted rapidly. Once short interest in the stock returned to the 2010 level, the share price plunged and closed the trading session on February 8 at $60, right before falling as low as $38.50 on February 19.
In early February, US Securities and Exchange Commission (SEC) started an investigation, checking social media and message board posts for signs that fraud played a role in recent market swings. Later this month, the YouTube streamer Keith Gill, who is known as Roaring Kitty and reportedly helped drive a surge of interest in GameStop, testified before a House panel. The witness list also included Reddit chief executive Steve Huffman, Robinhood chief executive Vlad Tenev, Citadel chief executive Kenneth Griffin and Melvin chief executive Gabriel Plotkin.
And just as soon it seemed retail investors had forgotten about the company, an unexpected turn of events happened. On February 25, GameStop stock boomed once again, with its price skyrocketing all the way up to $185 per share in a matter of hours. The stock closed the trading day at $108.73 per share.
While the reasons behind the surge are yet to be discovered, some suggest that it has to do with the company's recent announcement that its CFO, Jim Bell, will resign from his role on March 26.
In November 2020, Ryan Cohen, Chewy.com co-founder and a famous investor who acquired a 12.9 per cent stake in GameStop last year, wrote a letter to GameStop’s board, saying that he "lost faith" in Bell and sharing his concerns about the business: "Through our private conversations, we have explained to Mr. Sherman and the Board that GameStop has the ability to pivot toward becoming a technology-driven business that excels in the gaming and digital experience worlds. But this pivot requires the type of strategic vision that has not yet taken hold in the c-suite or boardroom."
Cohen added: "GameStop needs to evolve into a technology company that delights gamers and delivers exceptional digital experiences, not remain a video game retailer that over prioritises its brick-and-mortar footprint and stumbles around the online ecosystem."
Moreover, right after his House Committee Financial hearing, Keith Gill added some oil to the fire by doubling his stake in GameStop to 100,000 shares, allowing the company to enjoy the market’s spotlight once again.
GameStop stock forecast: can retail investors beat Wall Street?
Most analysts remain bearish on GameStop, saying that there is no fundamental basis for the rally to continue as the company’s financial health does not justify its growing market cap.
On January 27, Bank of America (BAC) issued a note on the stock, increasing its price target from $1.50 to $10 but reiterating an Underperform rating. Explaining their GameStop stock prediction, analysts said: “While it is difficult to know how much very high short interest and retail ownership could continue to put upward pressure on shares, we think fundamentals will again factor into the valuation.”
They also added that “the more business shifts from in-store transactions, the more difficult it will be to sell high margin pre-owned and collectibles merchandise which accounted for 46 per cent of gross profit dollars in 2019”.
Michael Pachter, an analyst at Wedbush, remains relatively bearish on the stock, too. In his interview on January 27, Patcher reiterated his $16 price target, adding that his opinion might not be relevant for investors at the moment: “There’s not a single institutional investor who’s sitting back and waiting for me to weigh in on whether to buy at $300. We’re long past the time where anyone who values my advice is involved in GameStop.
The analyst called the stock’s growth a “pyramid scheme”, saying that “the guys buying it at $300 think some greater fool will buy at $400, and so far the greater fools keep showing up.”
On January 27, Jason Katz, a managing director at UBS, also shared his opinion on the rally: “The price action is completely divorced from fundamentals. It’s a relatively small universe of retail investors that are pushing around a relatively small universe of stocks so at the end of the day, this Reddit army, they don’t have the wherewithal to sustain these big losses… it’s not going to be the institutions [left holding the bag]…it’s the kids on my basketball team asking me about how options work.”
William Galvin, Massachusetts Secretary of the Commonwealth, reminded us that “the marketplace should be a place where risk is taken, but not reckless risk and not a situation that undermines the system”.
Edward Moya, Oanda’s senior market analyst, warned investors: “The Reddit army should prepare for stricter rules and regulation shortly, which should kill the idea that what happened with GameStop will happen with others.”
Michael Burry, a famous investor and hedge fund manager, called the hype around the stock "unnatural, insane and dangerous".
On February 24, the Mad Money host Jim Cramer suggested that GameStop could get involved in cryptocurrency in order to justify its current valuations. Noting Paypal (PYPL) and Nvidia’s (NVDA) latest moves into the crypto market, Cramer said: “If GameStop were to turn itself into a 5,000-store introduction to crypto, make it so that they sell $1bn worth of stock and buy crypto with it, and then make it so it’s an international gaming place where you win Bitcoin, I think you can justify the stock price.”
Cramer also commented on the recent Reddit-inspired rally, saying that the regulators should get involved. He called the recent 100 per cent hike in the GME share price “a mockery”, and asked, “Where is the government?”
In the meantime, the average price target among eight analysts that issued ratings for GameStop in the past 12 months is $12.50, according to MarketBeat. The lowest GME stock prediction is $3.50 per share, while the highest is $33 given by Joseph Feldman from Telsey Advisory Group. However, all of these estimates were given before the stock’s bonanza started.
While the future of the stock remains to be seen, one thing is certain – this month's GameStop share news and events will long haunt many Wall Street investors.
The bottom line: is GameStop stock a buy right now?
The answer to this question solely depends on your investment goals and risk appetite. The furious rally seems to have no fundamental reasoning to it, however, many used to say the same about Tesla (TSLA), the world's currently most valuable automaker by market cap.
We suggest investors and traders exercise caution and do their homework before investing in the company. We recommend you do as much research as possible, taking into consideration the latest market trends, expert opinion, and fundamental and technical analysis.
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