Should I Buy GameStop Stock

GameStop Stock is the most talked-about stock of 2021. The story behind the famous short-squeeze is a once-in-a-lifetime opportunity that made a number of everyday investors very rich and nearly brought down Wall Street. Following the short-squeeze, Should I Buy Gamestop Stock?

GameStop Share Price

The famous GameStop Short-Squeeze commenced in January 2021. This initial spike sent the share price rocketing with a massive 2,741% jump over a month. We can see directly following the spike the share price recorrected to a price of around $44. For investors jumping in on the peak, this represents a drop of 91%.

Over the broader year, the share price has actually climbed 4,392% to its current valuation of $191.38. The 6-month performance is 981.01%, and over the last month, the price has retraced -36.8%. The 52-week range of the company is 3.77-483 (a difference of 12711.67%).

To put this all into perspective an initial investment of only $1,000 at the trough of $3.77 would have been worth a life-changing $127,116.7 at the peak.

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Source, TradingView

GameStop Share Price Prior to the Short Squeeze

Leading up to the short squeeze we can see the massive bearish trend of GameStop stock over the course of eight long years. Investors over the course of this period saw a paper loss of -93.4%. Again putting this into perspective an initial investment of $1,000, would have been slowly chipped away to a measly $66.

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Should I Buy GameStop Stock: Past Share Price

About

GameStop Corp is the world’s largest video game and entertainment software retailer. They a Fortune 500 company now ranking number 521 on the list. They have 53,000 employees and saw $5 Billion in revenues across their more than 4,000 stores and comprehensive e-Commerce properties across 10 countries.

GameStop, through its family of brands, offers the best selection of new and pre-owned video gaming consoles, accessories, and video game titles, in both physical and digital formats.

GameStop makes money through the sales of videogames, accessories, and consoles, collectible merchandise, and through sales of intangible memberships, and replacement plans.

The company’s global family of brands includes GameStop, EB Games, Micromania, ThinkGeek, and Game Informer magazine.

GameStop and EB Games locations within the European Union include stores in Austria, Denmark, Finland, Germany, Great Britain, Ireland, Italy, Norway, Portugal, Spain, Sweden, and Switzerland. Likewise, the company operates stores in Australia, Canada, Guam, New Zealand, Puerto Rico, and the United States.

The Big Gamestop Short-Squeeze

In the aftermaths of the short squeeze, there are now countless articles, videos, and general resources explaining what exactly happened.

In summary, it was realized that GameStop was extremely undervalued with growing eCommerce sales. Wall Street giants Melvin Capital and Citron Research took out massive short positions betting against the ‘outdated’ brick-and-mortar business model which looked like it was heading for the same fate as Blockbuster.

GameStop stock float was 136.03% shorted at the peak. That means more stock was shorted than was available on market. The sudden explosion in media attention from r/wallstreetbets caused mass buying of the stock to short-squeeze GameStop Stock.

This pump sent the share price rocketing and forced the short sellers to rebuy stock at largely inflated prices. The event was compared with the Volkswagen Short-squeeze of 2008.

Should I Buy GameStop Stock: Dividend History

Gamestop had paid a dividend since 2012. Their dividend payment was sporadic, ranging from 1-3 payments per year during this time period. The company completely cut its dividend in 2020 and no payments have been made thus far in 2021.

During this period the Gamestop’s average dividend yield was 6.15%, ranging from 3.4% to 13.9% in 2019.

Gamestop was largely regarded as a dividend stock, in 2019 they planned on switching to a share repurchasing model. In 2019 Gamestop repurchased 34.6 million shares for $178.6 million, at an average price of $5.14 per share. This represented a massive repurchasing of 34% on the total shares on offer.

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Should I Buy Gamestop Stock: Dividend History

Should I Buy GameStop Stock: Fundamentals

Market Cap$14.23 Billion
Shares Issued74.38 Million
PE503.63
EPS-1.78
Average Volume2,773,993
PEG
NTA per Share$5.60
ROE-13.2%
Debt$48.1 Million
Equity$879.5 Million
Should I Buy GameStop Stock: Fundamentals

Based on the current market cap of GameStop the stock seems largely overvalued. The last EPS of the company represented a loss equivalent to -$1.78 per share. Based on the last previous profitable period the company is still massively overvalued in terms of earnings multiples with a theoretical PE of 503.63.

Prior to the short squeeze, the standard PE for GameStop appeared largely undervalued averaging around 10x.

Gamestop shares are supported by $5.60 in net tangible assets. At the current price of $191.38, this only represents 2.92%, whereas a standard amount would often be around 20% or higher.

Should I Buy GameStop Stock: Financials

GameStop, amidst the Coronavis pandemic, like a lot of companies around the world prefaced their 2020 Annual Report with the following statement:

2020 WAS AN UNPRECEDENTED YEAR AND ONE WE WILL NOT SOON FORGET

Despite this Gamestop made the following highlights:

  • Generated a 191% increase in global E-Commerce sales to represent approximately 29% of total net sales. This growth allowed us to recapture a substantial majority of sales from temporary government-mandated store closings as a result of COVID-19.
  • Delivered over a $400 million reduction in our reported SG&A expenses compared to the prior year, as a result of ongoing cost optimization efforts. This led to a two-year SG&A reduction of $530 million, before severance and transformation costs taken in 2019.
  • Continued to transform our physical store presence through ongoing market optimization and global de-densification efforts. We closed a net 693 stores and reduced store operating costs for the year, while transferring a portion of store sales to E-Commerce and to neighboring locations.
  • Enhanced our financial position and flexibility with a stronger balance sheet, reflecting significant improvements in inventory management and related working capital, a healthier overall cash and liquidity position, a material reduction in overall debt, and the completion of a debt exchange offer.

Income Statement

We can see GameStop’s revenues have been on a downwards trajectory since 2018. In 2020 the company realized revenues of $5 Billion, a 21.3% drop from 2019. This year Gamestop again ended up with a Net Loss of -$215.3 Million, which has slightly improved from the following two years, mostly due to a reduction in expenses and the closing of stores.

GameStop has operated at an operating loss since 2018, we have seen sales declining year on year. I see this linked to the downfall of brick-and-mortar stores as customers switch to the convenience of online digital retailers.

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Gamestop has not seen a profit since 2017. In 2017 net profits were $34.7 Million. With these declining profits, it’s easy to see why the share price had declined leading up to the short-squeeze.

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Balance Sheet

GameStop does maintain a very strong balance sheet with $508.5 Million cash on hand. Their total assets as of January 2021 were $2.472 Billion. This largely comprised of 508M in cash, 602M in inventories, 201M in property, and 662M in operating lease right-of-use assets.

Overall Liabilities were $2.36 Billion, thus leaving $436.7 Million in net assets.

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Cash Flow Statement

We can see no dividends or repurchase of shares occurred in 2020.

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Should I Buy GameStop Stock: Technicals

The general consensus within the Technical Analysis community is currently Neutral on GME Stock. The moving averages and Technical Indicators seem to indicate a Sell.

Here’s A Breakdown Of The Detailed Technical Factors;

NameValueAction
RSI(14)47.199Neutral
STOCH(9,6)68.605Buy
STOCHRSI(14)73.673Buy
MACD(12,26)-1.950Sell
ADX(14)24.671Sell
Williams %R-23.803Buy
CCI(14)22.7877Neutral
ATR(14)4.2786Less Volatility
Highs/Lows(14)0.0000Neutral
Ultimate Oscillator48.680Sell
ROC0.231Buy
Bull/Bear Power(13)-0.8000Sell
Should I Buy GameStop Stock Technicals, Source: https://au.investing.com/equities/gamestop-corp-technical

Supports, Resistance, and Moving Averages Technical Analysis GameStop

We can see from the below graph GME is currently trading below its moving averages signifying a bearish pattern. We can see that it is approaching its first level of support at a share price of $159.21. The price seems to be well supported at $159.21 and $104.27. Its level of resistance is relatively high at a price of $306.87 (Around 60.5%, above the current share price).

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Should I Buy GameStop Stock: TradingView

GameStop Stock Insider Trading and Ownership

GameStop has a large proportion of insider ownership at 18.5%. This is something we see as advantageous. Having skin in the game ensures management’s motives are also in the best interest of shareholders. It also incentives them to grow the company’s share price.

General Public is the largest overall holder in GME with an ownership of 44.5%, Institutions own 37%.

Top Holders:

HolderShares Held% O/SFiling Date
RC Ventures LLC9,001,00012.531/10/21
BlackRock Institutional Trust Company, N.A.8,508,37911.853/31/21
The Vanguard Group, Inc.5,541,2237.723/31/21
State Street Global Advisors (US)1,858,5352.593/31/21
Norges Bank Investment Management (NBIM)1,811,7922.5212/31/19
Hestia Capital Management LLC1,355,1001.896/12/20
Sherman George E Jr (Former CEO)1,268,4621.776/9/21
Charles Schwab Investment Management, Inc.996,2411.393/31/21
Geode Capital Management, L.L.C.916,8281.283/31/21
Northern Trust Investments, Inc.606,8670.853/31/21
Should I Buy GameStop Stock, Source: https://news.gamestop.com/stock-information/institutional-ownership
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Insider Trading:

We can see there have only been two insider transactions in 2021: Directors Grube, and Fernandez. Both Directors executed a sale with a combined value of $545,767. We can see from the average share price data that Fernandez sold prior to the short squeeze, While Grube sold at a price of $217.78. Paper Hands.

Transaction DateInsider NameTitleBuy/SellNumber of SharesAverage Share PriceTotal TransactionShares Held After Transaction
6/23/2021James GrubeDirectorSell1,900$217.78$413,782.002,023
1/15/2021Raul J FernandezDirectorSell3,500$37.71$131,985.0031,789
4/17/2020George E Sherman JrCEOBuy25,000$4.52$113,000.001,127,762
4/17/2020James A BellCFOBuy4,500$5.00$22,500.00242,596
4/15/2020Steven R KooninDirectorSell34,396$5.36$184,362.5625,271
Should I Buy GameStop Stock, Data From: Nasdaq Market Activity

Should I Buy GameStop Stock: Current Short Positions

GameStop Prefaced their 2020 Annual Report with the following statement: A “short squeeze” due to a sudden increase in demand for shares of our Class A Common Stock that largely exceeds supply has led to and may continue to lead to, extreme price volatility in shares of our Class A Common Stock.

Stockholders that purchase shares of our Class A Common Stock during a short squeeze may lose a significant portion of their investment.

The below graph shows us the Share price alongside the number of short positions (bar graph) over time. We can see the number of shorts has dramatically fallen since the beginning of the year. At the peak, 136.03% of the float was shorted, compared to today whereas only 16.68% is shorted.

Floating stock refers to the number of shares a company has available to trade in the open market. 

Investopedia
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Should I Buy GameStop Stock: Short Squeeze Graph TradingView

Having a look at the current short data we can see a total of 9,670,000 shares or $2.15 Billion worth is shorted. This represents 16.68% of the float. Given the current average trading volumes of 25,233,920 shares, the market seems capable of easily accounting for all current shorts.

Current Short Volume9,670,000 Shares
Previous Short Volume11,970,000 Shares
Dollar Volume Short Sold$2.15 Billion
Short Sold Interest Ratio/Days to Cover1
Outstanding Shares71,815,000 Shares
Float Size57,960,000 Shares
Short Percentage of Float16.68%
Average Trading Volume25,233,920 Shares
Short Data Current as per June 15, Source

GameStop Stock in the Media

GameStop has been the most discussed share of 2021. Arguably two ingredients are needed in a short squeeze;

  1. A significantly over shorted stock
  2. Media attention.

If these two factors are replicated it is possible to recreate a short squeeze for any company. With the massive group behind r/wallstreetbets and then big names like Michael Burry and Elon Musk jumping on board there was no lack of media attention.

With the widespread coverage, there were many more people jumping aboard in FOMO. With so many investors rushing to the stock it’s easy to see how this catalyzed a massive spike.

Should I Buy GameStop Stock: Future Prospects

Given the current short interest, it seems the market is well equipped and capitalized to facilitate the current transactions. That being said a large, arguably key ingredient to GameStop’s success was the media attention creating a self-fulfilling prophecy. A Pump-and-Dump is possible no matter what percentage is shorted. Disclaimer SEC, I am not encouraging a pump-and-dump just pointing out the flaws in the system. I Swear.

With this being said its no doubt the share price will continue to be extremely volatile. So I think it’s pointless to try and predict the short-term share price.

“Number one rule of Wall Street: I don’t care if you’re Warren Buffett or Jimmy Buffett nobody knows if the stock is going to go up down sideways or in circles.”

GameStop Stock Business Plans and the Road Ahead

In the Annual Report GameStop highlighted a few points of focus for them going forward:

  • Investing in technology capabilities, including our E-commerce presence, systems, and customer-insights gathering.
  • Expanding our product catalogue and addressable market. Certain emerging categories represent natural extensions that we believe our customers expect from us.
  • Growing our distribution footprint fulfillment operations to improve speed of delivery and service. This will enable us to provide customers convenient, flexible, and competitive delivery options across the entire product spectrum

Competition

The video game industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions.

GameStop competes with mass merchants and regional chains; computer products and consumer electronics stores, toy retail chains, and direct sales by software publishers; the online environments operated by Sony (PlayStation Network), Microsoft (Xbox Live), Nintendo (Nintendo Switch Online), as well as other online retailers and game rental companies.

The main brick-and-mortar stores GameStop competes with include: Wal-Mart Stores, Target, Best Buy, JB HiFi, Big W,
and Amazon.com. These stores offer a competitive advantage over GameStop due to their diversification of products. We do believe that GameStop will continue to command a large portion of sales compared to brick-and-mortar stores.

I see the biggest threat to the future of GameStop is the rise in eCommerce, especially direct from software publisher platforms such as the PlayStation Network, Xbox Live, Nintendo Online, and the rise of online retailers and game rental companies.

the biggest threat to the future of GameStop is the rise in eCommerce

COVID has accelerated the push towards digital gaming stores, with GameStop reporting a 191% increase in global E-Commerce sales to represent approximately 29% of total net sales. So it is clear GameStop is adapting their business model well, but likely not as efficiently as the direct digital companies. A lot of their sales have increased in low-margin PSN and Xbox vouchers. This, alongside declining sales, is why it was shorted in the first place.

Market Size

The market for new physical console video game products was approximately $18.0 billion in 2020 in the countries GameStop operates.

It is also estimated that the market in North America for content in digital format was approximately $26 billion in 2020.

From these estimates that is a total addressable market of $44 Billion. GME’s sales were $5 Billion, representing 11.36% of the market.

Seasonality

GameStop has a high seasonality to sales favoring the fourth quarter, specifically the holiday period. In the final quarter, GameStop generates roughly 40% of its sales.

Should I Buy GameStop Stock: Prophet’s Take

It’s no surprise that GameStop looks extremely overvalued in terms of fundamentals. Gamestop is currently loss-making with crashing sales. The shares are supported by only $5.60 in net tangible assets, which represents 2.92%, of the share price. Prior to the short-squeeze, we did see GameStop stock as very undervalued.

At the current short interest, a short-squeeze is no longer a certainty. I think it is important to mention that the market is unpredictable. GameStop seems to be trading largely on hype making massive share price swings. Obviously, it’s possible to make money on the swings, but I see it just as likely to lose. Welcome to the casino.

“Speccies are just sentiment and hype”

Please Remember all Articles Published on Prophet Invest are Opinion Only

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