GameStop: A Great Company, But Massively Overvalued

·2 min read

Wedbush analyst Michael Pachter’s latest assessment of GameStop (GME) is something of a double-edged sword.

Following the headline-hogging game retailer’s latest quarterly results, the analyst was full of praise for the company’s top brass.

“GameStop has navigated an exceedingly difficult competitive environment and has managed to reduce its net debt from a balance of over $100 million to a net cash surplus of over $200 million in less than two years,” Pachter said.

The analyst credits the “financial engineering” of CEO George Sherman, who arrived in mid-2019, alongside the acumen of departing CFO Jim Bell, as to why the cash position is strong despite net losses of over $200 million during the period.

Pachter’s compliments come even after GameStop disappointed in its recent quarterly results.

In 4Q20, revenue came in at $2.12 billion, dropping by 3.2% year-over-year and missing the estimates by $110 million, while Non-GAAP EPS of $1.34 also came in below the Street’s forecast - by $0.08.

Despite the letdown, Pachter thinks GameStop is “well-positioned to be a primary beneficiary of the new console launches” and is optimistic the company can return to profitability in FY21.

However, as is well-known by now, GameStop has been the subject of a speculative frenzy in 2021 and there’s just no way to justify the current valuation.

So, despite raising his price target from $16 to $29 to “reflect excellent execution by management,” Pachter downgraded GME’s rating from Neutral (i.e. Hold) to Underperform (i.e. Sell). As for the new price target, the figure still indicates a drop of 84% from current levels. (To watch Pachter’s track record, click here)

Pachter summed up, “Our downgrade is not a reflection of our opinion of company management, which remains very high. Rather, it appears that the ‘real’ value of GameStop shares (the price willing buyers are prepared to pay in the open market) vastly exceeds the ‘fundamental’ value we believe investors expecting a financial return can reasonably expect.”

Pachter’s prognosis reflects the Street’s overall take. GameStop currently has a Moderate Sell consensus rating based on 3 Holds and Sells, each. While not quite as brutal as Patcher’s objective, the $57.75 average price target suggests shares will slide by 70% over the next 12 months. (See GME stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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