by As of this writing, January 26, 2021, Gamestop has seen some absolutely incredible returns. It is up over 886% over the last 3 months, and over 3,571% over the last 6 months! After analyzing various aspects of Gamestop in terms of its business and its fundamentals, here’s why it is probably NOT a good idea to buy or sell short Gamestop stock right now.
Contents
Ridiculous Market Cap
As of January 26, 2021, Gamestop has a market cap of $10.32 Billion.
There are many ways to value a company.
Let’s start by looking at the fundamentals.
According to its latest 10-Q statement, Gamestop’s stockholders’ equity as of October 31, 2020 was $332 million. That means that it sold off all of its assets and paid off its liabilities, it would have roughly $332 million in cash.
Sure, but what about its future cash flows?
For the 39 weeks ending on 11/2/19, Gamestop had a net loss of $491.9 million.
For the 39 weeks ending on 10/31/20 Gamestop had a net loss of $295 million.
In other words, it’s had a recent streak of negative earnings. Not good.
What else can be responsible for a company’s value? What about its intangibles?
While there are so many game retailers, from Best Buy to Target, and even digital storefronts like the Apple Store and Google Play, it’s hard to imagine Gamestop dominating the future gaming scene.
With shareholder’s equity of $332 million, negative earnings over the past two years, and immense competition, does Gamestop justify a market cap of $10.32 billion? I’ll let you decide.
Tremendous, yet Strange, Vote of Confidence
Ryan Cohen, a Chewy Inc. co-founder, disclosed an investment in GameStop in August. By December he had purchased 9 million shares of Gamestop for a total cost of $76 million.
In early January 2021, GameStop announced that Cohen and two other former Chewy colleagues would be joining the board, triggering a surge in the company’s share price.
Source: Bloomberg
Insane Volatility
As of this writing on January 26, 2021, Gamestop stock has a Beta of 1.43.
Beta is a measure of volatility, or systematic risk of a security.
The stock market as a whole has a Beta of 1.
So Gamestop’s Beta of 1.43 means that it is about 43% more volatile than the market.
With higher volatility, you can expect more extreme price swings.
Be ready for a wild roller coaster ride if you decide to purchase or short this stock.
Dwarfing the 1 yr Target Estimate
The 1 yr target estimate for Gamestop stock according to analysts is $12.39.
As of this writing, Gamestop is trading at $147.98 a share, which is about 12X its 1 year target estimate. How is this even possible?
Wild Speculation
According to Yahoo Finance on 1/25/21: “Shares spiked more than 100% as a clash between short-sellers and Reddit WallStreetBets (WSB) caused a massive short squeeze on the stock. A short squeeze forces those who bet against the shares to buy in order to forestall bigger losses, sending the stock price much higher.”
Media Attention
As if the stock hadn’t attracted enough attention over the past few days, Tesla CEO Elon Musk tweeted about it on 1/26/21.
His tweet is probably largely responsible for the 1/26/21 after hours increase of the stock price by 42%!
Mad Volume
The volume, or the number of shares that exchanged hands, on 1/26/21 was 178 million… nearly 9X the average volume of 21.5 million. People from all over are making bets, fueling a casino type gambling frenzy right now.
Perpetual Short Squeeze Machine
Any investor who has looked at Gamestop’s fundamentals and reviewed its business model would think that its stock is overpriced. An 886% gain over the last 3 months, and an over 3571% gain over the last 6 months?! Are you kidding me?
The rational decision would be to short the stock. Short sellers attempt to borrow the stock at a high price, and return the stock when the price has dropped, keeping the difference in price. In other words, they profit when the price of the stock goes down.
When you buy a stock, you have unlimited upside. Your stock could go up 10%, 100%, 1000% and more. Your downside is limited; when your stock is worthless, you can only lose up to 100% of your investment.
The opposite is true when you short a stock. You have limited upside because the value of the stock can drop to zero and no less. You have unlimited downside because the price of the stock can rise indefinitely, and you could end up paying a tremendous amount to close your position.
People are shorting the stock since they think that it is overvalued (and probably rightfully so). However, we all know how hard it is to time the market.
When the price of the stock goes up, the short sellers are panicking, thinking they need to close their positions before the stock prices increases even further.
Veteran trader Brian Shannon warned of something called a perpetual short squeeze machine.
“[Investors will] try to go in and short the stock, and then the stock rallies 10%, and they cover. And then what happens is it becomes a perpetual short squeeze machine.”
When the stock price goes up, short sellers get scared and close their positions, increasing the price even more. The increasing price scares even more short sellers, who also sell, which increases the price even more. The cycle continues almost as if perpetually.
Conclusion – Should You Buy or Sell Gamestop stock right now?
My one-year outlook for Gamestop is quite negative. Its stock price is not justified and I would expect a pullback in the not too distant future, and depressed prices in the long run.
So should you buy or sell short Gamestop stock right now? The answer is neither!
You should not buy Gamestop stock right now because:
- It is grossly overpriced. It has a market cap of over 20X shareholder’s equity and has had negative earnings over the past two years. It’s future outlook doesn’t look particularly promising either.
- It is trading at about 12X its 1 year target estimate without any real reason to justify the price.
You should not sell short Gamestop stock right now because:
- Gamestop stock could drop dramatically. For a short seller, that is a good thing. But the stock could continue to rise before it falls. Will you be able to stomach that or will you be able to hang on?
- We are all bad at market timing. You will not be able to accurately predict the bottom or the top
- The perpetual short squeeze machine is destroying short sellers right now.
If you want to pursue a path towards financial freedom, it’s probably a good idea to stay away from Gamestop stock right now; rather, continue to dollar cost average low cost index funds. If you’re the gambling type, don’t spend more than a few percentage points of your portfolio on risky bets on individual stocks.
