Gamestop's roller-coaster rumbles toward a reality check
In the wild, speculative ride known as Gamestop Corp., traders are about to get a real-world dose of data when the video-game retailer reports earnings next week. Whether the results justify the company's US$14 billion-market value is another issue entirely.
While shares of the Grapevine, Texas-based company have given back a huge chunk of this year's 2,460-per-cent gain after hitting a record intraday high of US$483 in late January, they're still up better than 900 per cent, closing Thursday at US$201.75. Skeptics are warning amateur investors who piled into the stock that this remnant of their euphoria could still come crashing down.
“The current valuation far exceeds our high fundamental expectations and projected multi-year benefits from the transformation,” wrote Telsey's Joseph Feldman, one of the stock's bearish analysts.
“The company has yet to show financial success in an industry that is rapidly shifting to digital.”
The volatile swings have been triggered by the frenzy of Reddit-fuelled retail traders and optimism surrounding a shakeup led by Chewy Inc. co-founder and activist investor Ryan Cohen. With the first quarterly update of the year set for March 23, the options market indicates that investors should expect a wild session, with an implied oneday move of roughly 24 per cent. At today's prices, that could mean a range of about US$97 a share.
Gamestop's market value soared to US$33.7 billion, making it briefly the largest company in the Russell 2000, before tumbling to US$2.68 billion and then recovering as a new wave of investors rushed in.
A short squeeze may have fuelled January's rally, with bets against 140 per cent of the shares available for trading. Since then, short interest as a percentage of the float has plummeted to 14 per cent.
Some of Wall Street's marquee names came out on top, with Bill Gross, the billionaire investor and co-founder of Pacific Investment Management Co. better known for bonds, saying he made US$10 million betting against the company.
Gamestop has been shunned by Wall Street for the past four years. None of the seven firms that follow the retailer recommends it, with four advising investors to hold the stock and three rating it at sell.
While retail bulls have continued to take to platforms like Reddit and Twitter to brag about their diamond hands, history shows investors should brace for a bumpy ride next week. The stock has slumped more than 10 per cent on the day following its earnings report over the past 10 quarters.