US video games retailer GameStop (NYSE: GME) share price rose by over 20% on Tuesday. As I write on Wednesday, the shares are up by a further 5% in early US trade. It looks like this top meme stock is back in play.
GameStop has strong backing from retail traders, who’ve pushed the stock up by 3,900% over the last 12 months. However, the shares are also being targeted by short sellers, who reckon this business is now overvalued. With a new management team in place and earnings due in September, I’ve been reviewing the shares. Is this a stock I should be buying?
GameStop shareholders have had a rocky ride in recent weeks. Ahead of Tuesday’s rally, the shares were down by 45% since hitting $302 on 9 June. Yesterday’s 20% surge has reduced this loss to 35%, but it’s still a painful drawdown for anyone who bought at the $300 level.
However, we may soon start to learn more about progress at this turnaround situation. Chief executive Matt Furlong and chief financial officer Mike Recupero were both appointed in June, so they may use next month’s earnings report to set out their initial strategy.
Interestingly, both men have come from senior roles at Amazon. I expect to see GameStop moving more of its sales online and perhaps slimming down its store estate. I think we might also see the company looking at opportunities to get involved in esports and livestreaming.
One big advantage
As a turnaround situation, there are several potential outcomes here. No one knows how things will turn out yet.
However, Furlong does have one big advantage — he’s got plenty of cash to work with. In June GameStop issued 5m new shares at an average price of around $225. This raised $1.1bn of fresh cash for the business.
My analysis suggests that based on last year’s losses, the company should now be able to operate for the foreseeable future. More realistically, this extra cash should mean that Furlong can invest in growth opportunities without needing to borrow money.
GameStop share price: what I expect in September
I’m impressed by the credentials of GameStop’s new management team. But the reality is that they only started work in June, so it’s too soon to know whether they can succeed.
GameStop has reported losses of more than $1bn over the last three years, during which its revenue slumped from $8.3bn to just $5.1bn. Turning this ship around may not be easy.
The good news is that the company will report its half-year earnings in September. This will give investors some fresh data to work with. In particular, we’ll learn more about how GameStop’s retail stores are performing as the pandemic eases.
I expect the company to publish earnings around 9 September, based on previous years. I can’t be sure, but if market conditions stay positive, I suspect the figures will get a warm reception, lifting the stock further.
Personally, my sums suggest that the shares are probably fully valued already. GameStop’s profits peaked at $400m in 2016. Achieving that now would value the business at 38 times earnings. That’s too much for me, so I won’t be buying at current levels.