STOCK ANALYSIS: GAMESTOP, A NEW DIRECTION FOR INVESTING?

OVERVIEW

GameStop Corp. is the largest worldwide video games retailer and is ranked 521st on the Fortune 500. Its medium-term history has been characterised by a consistent decline with a record net loss of $673 million being reported in February 2019. However, GameStop made international headlines during the first quarter of 2021 after an unprecedented short squeeze, backed by grass-roots investors, led to a 1,500% increase in its share price.

ANALYSIS

The EPS for Gamestop Corp for the first quarter of 2021 was $-1.01, a 38.48% decline year-over-year. The annual EPS for 2020 was $-5.38, an 18.36% decline from 2019. Overall, it is clear that Gamestop is a company in significant decline. This is underpinned by restructuring efforts that the company has undertaken in a bid to reduce operational costs. In September 2019, it was announced that between 180-200 of the least productive stores would be closed. Alongside this, four Board Directors were replaced. The long-term prognosis of Gamestop as a viable investment opportunity is overwhelmongly negative as consumer tastes trend increasingly away from Bricks and Mortar stores to virtual platforms such as Xbox live. Indeed the annoiuncement of Microsoft’s Xbox Game Service in 2017 led to an immediate 8% drop in the value of Gamestop stock. Arguably, Covid-19 has placed a further nail in Gamestop’s coffin as consumer’s were left with little option but to use rival services.

However, the main reason GameStop has gained notoriety is for the incredible period of volatility between January and February 2021. A short-squeeze, led by a co-ordinated online community from r/wallstreetbets, led to GameStop stock reaching an intraday high of $483USD on January 29th. This backing of GameStop stock went against hedge funds such as Melvin Capital, who closed out their position after losing 51 percent, with estimated losses of $4.5 billion. In this case, grass-roots, retail investors collectively bet against a handful of hedge funds and won. The hedge funds are estimated to have lost in excess of $19 billion. The case was referred to the SEC, who contacted GameStop in May. Securities regulators combed social media for signs of fraud and led to amateur investing sites, such as RobinHood, preventing investors buying into GameStop, raising allegations of establishment bias. The medium-term consequence for GameStop is a newly increased stable share price with a projected EPS of $-0.56. However, the period of volatility seems to have ended, for now, and as such GameStop Corp. does not present a particularly attractive opportunity for investment.

CONCLUSIONS

From a brief analysis of GameStop Corp. and the factors that have precipitated its’ turbulent history it is clear that it does not present an outstanding opportunity for long-term investment. However, the consequences of the January period of volatility have the potential to be seismic in their reach. It is convincing evidence that the global market has entered a period of ‘irrational exuberance’ where a previously unseen amount of money and influence has been devolved to internet communities who are not bound by traditional conventions of investment. The deviation from the expected projection blindsided analysts and is perhaps the first of many bottom-up fiscal revolutions.

Daniel Barnett, London School of Economics

Leave a Reply

%d bloggers like this: