GameStop Continues Meltup, Closed Price Target

GameStop Continues Meltup, Closed Price Target

To see how far GameStop Corp. has outrun anyone’s ability to render sensible analysis, consider what its dizzying rally has done to Wall Street’s best guesses of its value.

Now above $ 100, ignited by a small squeeze and arguably held in chat rooms, the stock is up $ 55 above the average forecast for equity handicappers tracked by Bloomberg after climbing 55% on Monday. The ratio between the two is the largest so far in the Russell 3000 and jumped for a third day, as Craze Trading pulled off a stretch in which the 37-year-old game retailer burned the Bears, shortening 139% of its shares Was.

This is happening in a stock that had fallen six straight years as a decrease in earnings before 2020, and which was not projected to make a profit before FY2023. While the fundamentals may one day be talked about again, now GameStop has become the latest and greatest show in a market emphasized by novice day traders who feel more like their playing each day.

“It doesn’t make business sense,” said Doug Clinton, co-founder of Loup Ventures. “It makes sense from an investor psychology standpoint. I think there’s a tendency where there is heavy retail interest for those types of traders to think about stocks differently than institutional investors in terms of what they’re willing to pay.”

Right now, they’re willing to pay 583% more than what analysts consider reasonable, on average. While perhaps fairly priced relative to its annual sales of about $5.2 billion in the 12 months through October, those sales are down 40% in just two years. The company is expected to report a per-share loss in both fiscal 2021 and 2022. To get a price-earnings multiple it’s necessary to look two years into the future, where the P/E is around 58.

The stock surged as high as $115.97 in Monday trading, at one point triggering a trading halt. It traded at $112.12 as of 10:23 a.m. in New York.

While Wall Street may have no clue what GameStop shares are worth, it does have ideas on what the company should do with them: sell.

“GameStop can issue equity and should sell stock to pay down debt,” said Wedbush Securities Inc. analyst Michael Pachter, who had a price target of $16 for GameStop as of Jan. 11. Doing so would involve “minimal dilution at these levels” and provide protection against an economic downturn. “They should do as much as the market will absorb,” he said.

Separately, Telsey Advisory Group analyst Joseph Feldman double-downgraded the stock to underperform from outperform on Monday, removing GameStop’s only buy-or-equivalent recommendation.

Bullish Options

Whatever the future holds, the recent past has been a bonanza for anyone who dared own the stock -- or, even better, bullish options. Calls expiring Jan. 29 with a strike price of $115 were the most-traded GameStop contract early Monday. Other similar wagers had correspondingly heady gains as contracts once seen as long-shot upward bets suddenly were in the money.

At investment research firm Hedgeye, analysts advised clients to not go short the stock, despite removing it from their “best idea long list” to reanalyze fundamentals. “Wouldn’t dare do that given the positive catalysts we think will be coming down the pike as the year progresses” with a very bullish calendar on the horizon, Brian McGough and Jeremy McLean wrote.

GameStop “has become a cult stock because of Ryan Cohen’s success with Chewy,” Wedbush’s Pachter said, referring to the activist investor and co-founder of online pet retailer Chewy Inc., who joined the company’s board this month. “I cannot discount Mr. Cohen’s past successes and don’t know what he has in mind going forward, but I need to see their strategy before I give them credit for materially higher earnings power.”