GameStop stock soared more than 150% this week alone.
Michael M. Santiago/Getty ImagesGameStop stock fell on Friday after its sudden surge in the two prior trading days. An analyst at BofA Securities says, “don’t blame shorts” for the sudden return to volatility.
GameStop stock closed down 6.4% to $101.74 on Friday, but the stock soared more than 150% this week alone.
By shorts, BofA Securities analyst Curtis Nagle refers to when bearish investors sell borrowed shares, with the hopes of buying shares back at a lower price and returning them. The difference minus borrowing fees is the short seller’s profit. While some observers may have looked to short sellers as a possible reason for the latest surge in the stock, Nagle is skeptical.
He notes that the stock’s short interest sits at about 25% of shares outstanding, significantly below the short interest seen last month. Instead, he thinks retail investors seem to be driving the shares higher this time.
“To put it into another context, GME’s trading volume over the past two days is ~15x the current number of shares short,” he wrote.
In a note on Friday, Nagle reiterated a $10 price target and Underperform rating on GameStop stock (ticker: GME). In other words, Nagle sees 90% downside from recent levels.
While some users on Reddit’s WallStreetBets forum say they are buying GameStop stock to make a quick buck or to send a statement to hedge funds, there are plenty who believe the entrance of Chewy co-founder Ryan Cohen can help the company reinvent itself as an e-commerce giant in the gaming and technology space. While Nagle believes GameStop is in need of a change, he is skeptical about the likelihood of a turnaround.
“In our view, GME is starting from a very challenged position including negative EBTIDA, persistent digital disintermediation and declining customer engagement,” Nagle wrote, with Ebitda referring to earnings before interest, taxes, depreciation, and amortization. “We also question the merits of a greater push online (which is likely to further hurt profitability near term on needed investments) as it could negatively impact high margin preowned and collectible segments.”
Earlier this week, Telsey Advisory Group analyst Joseph Feldman reiterated a $33 price target. That’s actually the highest Wall Street price target listed by FactSet. His estimate for fiscal year 2022 adjusted Ebitda is $254 million, well ahead of consensus estimates. He actually does think the company will benefit from new gaming consoles, the new perspective from its three new board members, and a healthier balance sheet. But he still rates the stock Underperform.
“We believe the company has yet to show financial and execution success in an industry that is rapidly shifting to digital,” Feldman wrote. “Importantly, we believe the current valuation levels exceeds our high fundamental expectations and projected multiyear benefits from the transformation.”
Meanwhile, Jefferies analyst Stephanie Wissink reiterated a Hold rating on Wednesday, though she has a $15 price target. She wrote that last month’s deal—which added Cohen and two associates to GameStop’s board—should set in motion changes at the retailer.
“We expect the traditional retail model to remain to some extent, but will be recast in an omnichannel, experiential form factor,” she wrote. “We expect greater value to be placed on the activist agenda related to CRM/customer data, digital platforms, and partnerships that give GME access to downstream value from hardware and software sales.”
Write to Connor Smith at connor.smith@barrons.com
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