GameStop (GME) Stock Price and Forecast: With GME results Tuesday, come on down, the price is not right
- Gamestop reports Q4 2020 results on Tuesday, March 23.
- GME shares have remained strong, bouncing from sub-$50 lows.
- GameStop likely to discuss digital future, capital raise.
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GameStop shares are treading water ahead of Tuesday's release of Q4 earnings. GameStop results will be released after the market closes on Tuesday. Results themselves will be watched by investors, but it is comments around the digital strategy and the possibility of a capital raise that will be more important.
GME stock news
GameStop is/was a struggling online video game retailer with shops located all around the world selling – yes, you guessed it – video games. As we all know, retail is a struggling space as online continues to take over, and this has been a trend for GameStop too. As a result, Gamestop was heavily shorted by hedge funds as they bet that the price would decline further.
GameStop's share price had been languishing below $10 for a considerable time and hit $2.57 by early April 2020 as the global pandemic raged. From the shares staged an impressive recovery, in line with global stocks. GME shares just reached $20 before 2020 was over.
From here it gets interesting though as the power of retail suddenly became a force that could not be ignored by Wall Street. R/WallStreetBets is a Reddit community for stock market talk where GameStop started to trend heavily in early 2021. GameStop ran and ran and eventually exploded as talk of squeezing hedge fund short positions fizzed and exploded into mainstream consciousness. GameStop shares traded up to nearly $500.
The Robinhood saga then tempered things with multiple brokers placing restrictions on purchases of GameStop and other retail meme stocks. GME shares collapsed down to below $100 in a matter of days.
Since then the shares consolidated around the $60-80 range before exploding again in late February to break up to $184.
The catalyst was the CFO stepping down and then Ryan Cohen reportedly leading GameStop's digital transformation strategy, helping in the search for a chief technology officer. Cohen previously transformed Chewy from retail into e-commerce, so investors see similar potential now that he has got his head in GameStop.
GME stock forecast
Once results are in, attention will turn to the conference call after market close on Tuesday. This is where things may get tricky. GameStop likely needs to raise money to fund this transition into the digital space. In December it appeared the retailer was preparing to do this as it filed for a $100 million at the market equity sale. At the time GME shares were below $20. Now with the shares trading at $200 a significant amount of capital could be raised. GME liquidity has skyrocketed and so has investor enthusiasm. Whether institutional investors are as keen as the retail crowd remains to be seen, but a discounted offering should be easily achievable.
Gamestop needs cash if it is to move into the digital space and reposition itself. GME does make money, but it has been steadily declining. In 2016 revenue was over $9 billion, but by 2020 this had dropped to $6 billion. Total debt has been falling though from $815 million in 2017 to $419 million in 2020, so Gamestop could certainly raise fresh debt to fund its digital strategy.
Doing so however by way of a share placing will lead to a dilution for existing shareholders and put renewed selling pressure on GME shares.
Looking at the balance sheet and income statement for Gamestop, it is far from the worst company you will see, but it is when you factor in the valuation of Gamestop that you see just how out of sync things have become. Gamestop currently has a market capitalization of $14 billion! The average price target from Wall Street is $14.64 from Refinitiv. I know this is an us versus Wall Street saga, but even Wall Street cannot get it that far wrong!
I have to add my voice, unfortunately, to the sell side. If I owned them, I would be selling GME shares. Short term they whip around and maybe people can make money, but as it stands this is not a long-term investment for me. The forward P/E is one of the highest I have ever seen.
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Author
Ivan Brian
FXStreet
Ivan Brian started his career with AIB Bank in corporate finance and then worked for seven years at Baxter. He started as a macro analyst before becoming Head of Research and then CFO.
