National Post (National Edition)
What's the US$23B GameStop really worth? Maybe US$2B
With GameStop Corp. soaring once again to record highs on Wednesday, sending its market value above US$23 billion, the ailing video-game retailer is now worth nearly as much as Delta Air Lines Inc. and more than Kellogg Co.
This is a company that some analysts essentially wrote off a year ago, that has been shuttering hundreds of stores, that has struggled for years to regain relevance in the era of Amazon.com Inc.
But GameStop's shares are no longer rooted in business reality after Reddit fans propelled them to stratospheric highs — part of a now well-documented phenomenon that has spread to AMC Entertainment Holdings Inc. and Tootsie Roll Industries Inc.
GameStop is worth more than almost 90 per cent of U.S. companies in the Russell 3000. And it trades for about 67 times its book value, which would put it in 34th place in the index — just behind Zoom Video Communications Inc.
So what is GameStop really worth, if we lived in a world where the Redditors had never gone down this path? Probably around US$2 billion.
At around US$326, the share price is more than 10 times higher than it would be based on the company's fundamentals. Analysts typically look at cash flow, growth and debt to figure out target prices. Of course, that system hasn't worked as well in the current era, but it still provides a sense of what GameStop might be worth in a parallel universe — or in this universe, once the hysteria subsides.
“I think it's fair to say that the market is completely disconnected from GameStop fundamentals here,” said Matthew Kanterman, an analyst at Bloomberg Intelligence.
GameStop, based in Grapevine, Texas, has declined to comment on its stock run-up.
The company has long been struggling, even after varied attempts to revamp its business, including a failed push into offering mobile phones. New game consoles introduced in the fall provided a jolt to sales, but revenue is still projected to decline by 18 per cent this fiscal year.
While next year should be better, with single-digit growth, free cash flow may drop by about 114 per cent, according to Bloomberg estimates. The company has been scaling down its operations and — like most brickand-mortar retailers — is still reeling from COVID-19. In the long run, it faces a shift to online games that will be difficult for a sprawling physical chain to adapt to.
“Fundamentals are about companies that eventually return the cash to shareholders, usually in terms of dividends, but there's no way that GameStop is going to do that,” said Anne Stevenson-Yang, J Capital Research co-founder.
Activist investor Ryan Cohen, who made a fortune running Chewy.com, is seen as a potential saviour of GameStop. He wants to expand GameStop's product line to be more like Amazon's.
But a turnaround would take time and is by no means certain to succeed.
“I'm skeptical — even now with the Cohen regime — that they can meaningfully steer the ship out of this,” Kanterman said. “They have tried and failed multiple times in the past to diversify away from physical-games retail — mobile phones, collectibles, making and publishing their own video games — only to eventually exit all of those businesses in turn.”
GameStop said during its last quarterly call that it would announce its strategy in January. And Cohen recently joined the retailer's board, offering fresh hope.
But without knowing what the plan is, it's hard to make firm assessments.
“I have a US$16 price target based on US$1 of earnings power,” said Michael Pachter, an analyst at Wedbush Securities. “It's possible that Ryan Cohen could come up with a plan that would allow me to raise my estimates, but I haven't seen it yet, so am keeping my target till he shows me a path to greater profits.”
“These are not normal times and while the (Reddit) ... thing is fascinating to watch, I can't help but think that this is unlikely to end well for someone,” Deutsche Bank strategist Jim Reid said.
BlackRock Inc, the world's largest asset manager, could have made gains of about US$2.4 billion on its investment in GameStop. It owned about 9.2 million shares, or a roughly 13 per cent stake, in GameStop as of Dec. 31, 2020, a regulatory filing showed.
But extreme volatility means investors also stand to lose money, said Matthew Keator, managing partner in wealth management firm the Keator Group in Lenox, Mass.
“It's a dangerous game to play from both sides of the spectrum, whether you're long or short. You get close enough to the fire you're going to get burned,” he said. “At some point in time, valuation is going to matter and it won't matter what social media is cheering the stock on.”
According to research firm S3 Partners, total short interest in GameStop was US$10.6 billion as of Wednesday. In the last seven days the short has increased by US$117 million, or 1.1 per cent, as the stock price surged.
Year-to-date, GameStop shorts have lost US$19.15 billion, including US$9.85 billion on Wednesday as of a US$285 share price, according to Ihor Dusaniwsky, S3's managing director of predictive analytics.