If The Meme Stock Craze Is Ending, GameStop Isn't Worth Much

Seeking Alpha2021-11-29

Summary The meme trading craze looks to have ended, threatening GameStop's share supply/demand balance. Valuations have overshot any rational financial analysis or backing by the underlying business....

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李育儒
2021-11-29
李育儒
But it isn't ending and $游戏驿站(GME)$should worth at least $600 at current float now
- Venus_M:
  time will proof to them
gky
2021-11-29
gky
Like
- Wafu:
  Done
- DragonKing:
  ok
- Ignis:
  ok

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My last article in November 2020 explained a short-term oversold condition around $20 a share. Luckily, I made a little profit on that position, and escaped before the once-in-a-lifetime short squeeze completely took hold. With the help of incredible buying volumes by small retail investors following website recommendations (the meme craze of early 2021), GameStop rose from $18 on the first trading day of January to $483 by the end of that month! That’s the kind of superb percentage Big Tech gain witnessed over a decade or two, not a few trading weeks. Literally, fortunes were made and lost in GameStop during 2020-21 (depending on your side of the trade).\nAnyway, the stock has flatlined or declined in price ever since this momentous short squeeze forced a number of hedge funds to cover (purchase) the stock at horrific loss levels. A good ten months later, investors in the stock need to ask themselves: what is the underlying business really worth, if the 2021 stock market bubble is starting to burst? My answer is the downside could be enormous, and all shareholders should seriously consider taking some money (especially large profits) off the table.\nImage Source: Company Website November 26th, 2021\nWeak Consensus Outlook\nWall Street analysts following actual business trends are not very optimistic on GameStop’s immediate future. Below are their forecasts for fiscal 2022 (the current year) and 2023. Sales are not projected to grow by leaps and bounds to justify the price surge from a year ago, and the company is struggling to report an operating profit as currently configured.\nSource: Seeking Alpha\nAgain, Seeking Alpha’s grades of the stock setup and computerized quant scoring of earnings and equity trading momentum leave a lot to be desired in late 2021. If you are looking for strong value or high growth rates, GameStop fails miserably as a buy idea.\nSource: Seeking Alpha\nClear Overvaluation\nSure, the gaming industry is growing, and the enterprise has a retail niche to play for consumers, but does the valuation of the stock match reality? My answer is a resounding NO. While the $5 price of 18-24 months ago was extremely undervalued (I said so in previous articles), today’s $200 price is the polar opposite for overvaluation. I come up with a long-term underlying worth closer to $50 for GameStop. Below are some stats to explain why.\nThe company does not earn a profit today, the primary goal of any business operation. Compared to other national third-party gaming retailers Best Buy(NYSE:BBY) or Walmart(NYSE:WMT), GameStop is uniquely unprofitable as a competitor. And, if you can choose where to put your investment capital, why not pick a higher profit margin game developer like Electronic Arts(NASDAQ:EA), Activision Blizzard(NASDAQ:ATVI) or Take-Two(NASDAQ:TTWO)?\n\nLet’s review a decade of trading history revolving around the equity’s price to trailing sales, cash flow, and book value. On these underlying fundamental metrics, GameStop is currently valued at 3x to 5x its 10-year average setup!\n\nVersus the peer group, GameStop is in nosebleed territory vs. profitable retailers on price to sales, and is approaching the high valuation multiples of the super-profitable game development businesses.\n\nOn price to cash flow, $200 a share fails miserably for a fair valuation. It is double the ratio of gamers and 4x the ratio of retailers. Keep in mind all of the group actually churns out income for owners, while GameStop does not.\n\nAgain, on price to book value, GameStop is the most expensive by far. The fascinating note to contemplate: a year and a half ago, the valuation story was completely reversed, with GME the cheapest of the group, hands down no argument, on every single fundamental comparison. Smart investors/traders look for deep value to buy, while selling out after price has risen above fair value, like today.\n\nShort Squeeze Fuel Exhausted\nThe bad news for short-term investors is the “tackling fuel” for the monster climb in January is gone. The short position is relatively normal today against other U.S. stocks, as opposed to its uniquely outsized setup going into 2021. If you are hoping for a move to $300 or even higher soon, the mathematical odds say that’s a longshot to happen.\nThe stats today are 8.9% of outstanding shares have been shorted, and all shorts could be covered over 2.7 days of typical trading volume. These numbers are a far cry from December’s 110% of total shares outstanding or February 2020’s days to cover of 24x.\n\nIn fact, against the gaming peer group, GameStop’s short position stands at a decade low, and is more typical of the group’s short interest of five years ago. This idea is graphed below.\n\nTechnical Chart Pattern\nWhile the chart pattern was basing with positive underlying momentum at $5 a share 18 months ago, today the technical picture is weak during a more volatile zig-zag pattern. Price is doing its best to remain above the important 200-day moving average around $183 currently, and the blip higher in November is a short-term positive. However, my favorite momentum indicators are either bearish or neutral on the stock. The Accumulation/Distribution Line and Negative Volume Index are amazingly weak for a stock not in price decline, while On Balance Volume has done nothing positive since March. It appears trading activity has been a standoff between small aggressive retail buyers and regular selling by hedge funds and institutions. Who will break the tie?\n\nFinal Thoughts\nWould I short GameStop around $200 a share? I am not currently contemplating such a trade, because it is “the” posterchild of the meme craze. Plus, I can see a resurgence in Covid-19 spread over the winter causing some money to flow into stay-at-home entertainment names, like those in the gaming industry. However, a price break below $183 (the 200-day moving average) could mean a serious sell-off from its overvaluation plateau may be starting.\nI come up with possible upside of $250 a share in 12 months, to a worst-case scenario well under $100 per share. I rate the shares aNeutraltoAvoidselection for rational investors. There are hundreds of other stocks with better risk/reward setups than GameStop. And, I write about the strongest buy propositions I can find on Wall Street in my articles. All told, I would prefer to own any of the five peer companies mentioned in this article over GameStop for buy-and-hold portfolio designs. I specifically suggested Walmart several weeks ago here as a defensive blue-chip buy candidate.\nIf you hold shares, I absolutely think it prudent to lighten up your position in case a major bear market hits the U.S. equity market into 2022. Under such a scenario, newbie and weaker-hand owners of the stock could sell en masse, just like they bought during January. If business sales trends fail to meet expectations in a recession next year, valuations may not support the stock until $100 or even $50 a share is reached. At least, that’s how past recessions and stock market busts have affected leading mania picks, opposite of the straight up ride during the boom.","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":600470585,"gmtCreate":1638194022757,"gmtModify":1638194035235,"author":{"id":"3560736841816623","authorId":"3560736841816623","name":"李育儒","avatar":"https://static.tigerbbs.com/f2c196ab620e62eba6f9dfcbc9464a6d","vip":1,"crmLevel":2,"crmLevelSwitch":0,"authorIdStr":"3560736841816623","idStr":"3560736841816623"},"htmlText":"But it isn't ending and <a href=\"https://laohu8.com/S/GME\">$游戏驿站(GME)$</a>should worth at least $600 at current float now","listText":"But it isn't ending and <a href=\"https://laohu8.com/S/GME\">$游戏驿站(GME)$</a>should worth at least $600 at current float now","text":"But it isn't ending and $游戏驿站(GME)$should worth at least $600 at current float now","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":6,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/600470585","repostId":1137228068,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":6772021,"gmtCreate":1638197928867,"gmtModify":1638197928867,"authorId":3566385558470298,"author":{"id":3566385558470298,"idStr":"3566385558470298","authorId":3566385558470298,"name":"Venus_M","avatar":"https://static.tigerbbs.com/525433622d774840840ddaacaf2281d2","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":600470585,"type":1,"supId":0,"prevId":0,"content":"time will proof to <u>them</u>","text":"time will proof to <u>them</u>","html":"time will proof to <u>them</u>"}],"langContent":"CN"},{"id":600581398,"gmtCreate":1638174046503,"gmtModify":1638174049134,"author":{"id":"3586473514667147","authorId":"3586473514667147","name":"gky","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"authorIdStr":"3586473514667147","idStr":"3586473514667147"},"htmlText":"Like","listText":"Like","text":"Like","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":3,"repostSize":0,"link":"https://laohu8.com/post/600581398","repostId":1137228068,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":6768308,"gmtCreate":1638176785279,"gmtModify":1638176785381,"authorId":3575505100092231,"author":{"id":3575505100092231,"idStr":"3575505100092231","authorId":3575505100092231,"name":"Wafu","avatar":"https://static.tigerbbs.com/0fa81128865bb0701d14c8c5b8570921","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":600581398,"type":1,"supId":0,"prevId":0,"content":"Done","text":"Done","html":"Done"},{"id":6768147,"gmtCreate":1638175213779,"gmtModify":1638175213816,"authorId":3580988274582448,"author":{"id":3580988274582448,"idStr":"3580988274582448","authorId":3580988274582448,"name":"DragonKing","avatar":"https://static.tigerbbs.com/999074a932b6e7b44c07fcebc581aacb","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":600581398,"type":1,"supId":0,"prevId":0,"content":"ok","text":"ok","html":"ok"},{"id":6768141,"gmtCreate":1638175157392,"gmtModify":1638175157428,"authorId":3574686466924712,"author":{"id":3574686466924712,"idStr":"3574686466924712","authorId":3574686466924712,"name":"Ignis","avatar":"https://static.tigerbbs.com/543d1f3e8b4901fba226eb61e5713bc4","vip":1,"crmLevel":4,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":600581398,"type":1,"supId":0,"prevId":0,"content":"ok","text":"ok","html":"ok"}],"langContent":"CN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":28,"commentSize":2,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1137228068"}