GameStop Is Reddit’s r/WallStreetBets Meme That Just Won’t Stop
GME stock keeps rewarding the WSB crowd
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Q1 2021 hedge fund letters, conferences and more
GameStop (NYSE:GME) is now the poster child of meme stocks. In Reddit’s r/WallStreetBets, sharing memes to add to the humor of buying a stock is the norm. With GME stock, the buying frenzy is more complicated than that. GameStop buyers wanted to cause a short-squeeze against hedge funds.
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In the nearly five months since the short squeeze sent shares to a $483 high, the short-sellers did not learn their lesson. Short interest is still high. This could lead to the stock climbing steadily higher.
Other Stocks Join GME Stock
Last week, AMC Entertainment (NYSE:AMC) rose by 81%, BlackBerry (NYSE:BB) jumped by 39% and Koss (NASDAQ:KOSS) rose by 18%. Reddit users spread their buying beyond GME shares to those names. As speculative buyers unwind their long position in those shares, they will hold on to only one company: GameStop.
Unlike GameStop, AMC is selling as many shares as it can to capitalize on AMC prices rising. GameStop is not diluting its loyal shareholder base. Instead, the company sold a modest 3.5 million shares on April 26. It previously redeemed around $216.4 million in Senior Notes due in 2023 on April 30. The early redemption lowers GameStop’s debt levels. Additionally, it improves cash flow because the company does not have to pay 10% interest rates on them.
GameStop may put the $21.6 million in interest costs saved back into the business. In addition to the $551 million raised, the company may rely on its top shareholder, Ryan Cohen, for direction.
Retail Electronic Gaming
GameStop’s physical store space is at the core of the business problem. Customers no longer need to buy used games at the locations when they can conveniently buy digitally downloaded games instead. Still, GameStop’s e-commerce initiative will compete with big retailers like Walmart (NYSE:WMT) and Microsoft (NASDAQ:MSFT). It now has a massive cash balance on hand to fund an aggressive push to this online marketplace.
GME stock offers tremendous value if management ends the revenue decline. For example, the company has a low bar to overcome. In a five-year discounted cash flow model: EBITDA (earnings before interest, taxes, depreciation and amortization) Exit, the model below uses an EBITDA Exit multiple to calculate Terminal Value after five years.
|Discount Rate||7.0% – 9.0%||8.00%|
|Terminal EBITDA Multiple||56.9x – 58.9x||57.9x|
|Fair Value||$253.66 – $286.28||$269.47|
Model Courtesy of Finbox
Assuming a modest 15% annual increase in revenue annually starting in the fiscal year 2023, GME shares are worth around $270.
GameStop has the leadership and management team ready to pivot away from just selling games online. Thanks to continued coverage of the stock in 2021, the brand is a household name. GameStop may capitalize on the renewed brand awareness to sell products to them. But the company cannot rely on hardware sales alone. It needs to par its store count to cut rental and real estate costs. Then it needs to identify its areas of strength in the online space and carve a niche.
GameStop may easily differentiate itself from big-box retailers like Walmart. Pivoting its business model is nothing new. The media discussed this approach in 2019 and again in April.
Ryan Cohen, a cofounder of food-to-treats portal Chewy (NYSE:CHWY) has the expertise to turn GameStop into something bigger. It could turn the company into a gaming platform. Roblox (NYSE:RBLX) is an example of a hot game platform. It could enter the esports betting market. Skillz (NYSE:SKLZ) is pivoting into that space as it expands beyond the online mobile multiplayer video competition platform.
GameStop has millions of options on hand to recreate its business. It has plenty of cash on hand. Most importantly, it has no risk of bankruptcy any time soon. This will give management the time it needs to restructure the business. Online e-commerce is hotter than ever. GameStop now has the chance to bask in that market.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
Article by Chris Lau, InvestorPlace