GameStop’s Roller Coaster Ride Resumes

GameStop GME had another huge move up on Wednesday after the company announced the CFO was resigning the company. Normally a stock declines when a CFO suddenly departs but GME increased over 100% yesterday, moving from $44.97 to $91.71, an increase of 104%. It continued the move in the after-market, rising $76.29 to $168, up an additional 83%. The market cap at Wednesday’s close was $6 billion and in the after-market was $11 billion.

The Wall Street Journal reported that, “GameStop’s finance chief was forced out of his role as activist investor Ryan Cohen pushes for a digital transformation of the ailing videogame retailer.” In this type of situation it could make sense for a stock to move higher but not to double. Wednesday’s rebound and the follow-through in the after-market is probably being driven by the Reddit crowd. They need to be very wary of another steep rise followed by another sharp fall.

The fundamental numbers still don’t make sense

Before Covid-19 derailed the U.S. and worldwide economies GameStop was slowly losing revenue from fiscal 2017 to 2019 then had a sharp drop-off in fiscal 2020. GameStop may be able to shake up its business enough to recover at least some of downturn but it won’t happen overnight.

  • Fiscal 2017 revenue: $8.6 billion
  • Fiscal 2018 revenue: $8.5 billion
  • Fiscal 2019 revenue: $8.3 billion
  • Fiscal 2020 (Feb. 1) revenue: $6.5 billion
  • Fiscal 2021 revenue: $5.3 billion estimate
  • Fiscal 2022 revenue: $5.6 billion estimate

When calculating the company’s valuation metrics these results use fiscal 2019’s $8.3 billion in revenue so as to be as generous as possible.

At Wednesday’s close of $91.71

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  • Market cap of $6 billion
  • 5 times greater than December 31, 2020 market cap
  • 0.72x market cap to fiscal 2019’s revenue
  • vs. 0.15x at December 31, 2020
  • Closed higher only on 5 other days: January 26 to February 1

At the after-market price of $168

  • Market cap of $11 billion
  • 9 times greater than December 31, 2020 market cap
  • 1.3x market cap to fiscal 2019’s revenue
  • vs. 0.15x at December 31, 2020
  • If GME closes at $168 will have only closed higher on 4 other days: January 27 to February 1

The roller coaster ride resumes

As seen in the chart below Wednesday’s rebound and the potential follow-through on Thursday shows the stock could continue to move higher, but it will almost assuredly fall back to earth.

After a peak close of $347.51 on January 27 and an intra-day high of $483.00 the following day, it only took three days for the stock to close at $90, down 74% and 81%, respectively. And only another two days to close at $53.50, down 85% from the peak close and down 89% from the peak intra-day high.

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