Time To Sell GameStop Stock After A 170% Rally?
We believe there may be better places for your money than GameStop stock (NYSE:GME) at the present time. GME stock trades at around $10 currently, rising a solid 70% since the beginning of the year. It traded at $4 in late March, when the broader markets made a bottom, and it has rallied roughly 170% since then, as the Fed stimulus largely put investor concerns about the near-term survival of companies to rest. Other than that, GameStop’s stock move over the recent months was triggered by 2 major factors.
1. The launch of new generation of consoles this holiday season means strong sales for GameStop. Both Sony and Microsoft will launch their newer consoles with the option of physical discs, implying there will be demand for physical software as well at GameStop stores. 2. The other factor is last week’s news of Ryan Cohen, the largest individual investor in GameStop with a 10% stake, pitching GameStop to compete with Amazon in online shopping. This led to a 20% jump in GME stock in a single trading session on Sep 22.
While the first factor justifies the move in stock price this year, the second factor does not. It’s quite possible GameStop may do well over the coming years, but challenging Amazon appears to be an uphill marathon for a company with a market cap of around $650 million compared to $1.6 trillion for Amazon. Now despite the launch of new generation consoles, the consensus annual revenue for GameStop is 14.5% below the levels seen last year, primarily due to the impact of Covid-19. This will also impact its bottom line, which is estimated to be a loss of $2.11 per share in the current fiscal. Given the impact of Covid-19 on GameStop’s business, and in view of the strong rally in GME stock since late March, we believe that the stock has little room for growth in the near future. Our conclusion is based on our detailed analysis of GameStop stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
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2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 49% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here’s how GameStop and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)
GameStop vs S&P 500 Performance Over 2007-08 Financial Crisis
GME stock declined from levels of around $38 in September 2007 (pre-crisis peak) to levels of around $18 in March 2009 (as the markets bottomed out), implying GME stock lost 52% from its approximate pre-crisis peak. It failed to stage a recovery post the 2008 crisis, and slid to levels of about $15 in early 2010, dropping by another 18% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51%, followed by a recovery of 48%.
GameStop’s Poor Fundamentals In Recent Years
GameStop’s revenues have declined from $9.4 billion in 2015 to $6.5 billion in 2019, primarily due to store closures. GameStop has closed roughly 2,000 of its stores since 2017, as it faced significant challenges to its brick & mortar business model from the digital channels. Some of its acquisitions, such as Spring Mobile, turned out to be a poor decision. With declining revenues, the margins also contracted, and the company’s bottom line took a massive hit. The company reported EPS of $3.80 in 2015 and it dropped to a loss per share of $5.38 in 2019. Furthermore, the company’s Q2 fiscal 2021 revenues (fiscal ends in January) were 27% below the level seen a year ago, though the losses narrowed to $1.71 per share compared to $4.15 in the prior year quarter.
Does GameStop Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
GameStop’s total debt decreased from $0.8 billion in 2016 to $0.5 billion at the end of Q2 fiscal 2021, while its total cash remained at around $0.7 billion over the same period. The company also generated $0.1 billion in cash from its operations in the first six months of fiscal 2021, and it appears that GameStop will be able to weather the crisis.
CONCLUSION
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations
Going by the historical performance and after the recent rally, we believe that GME stock has little room for growth in the near future.
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