GameStop is not worth owning anywhere above $ 45 a share, based on company fundamentals, as explained when we closed List of focus: Long position in stock at the end of January.
went on to climb as high as $ 347, even higher for the day, before taking a roller coaster route back around $ 185.
To let readers understand how insanely overvalued the stock is, we do the math and show how the business will have to do to justify the stock price of $ 347. la.
undefinedCrazy ”at $ 347 is explained: It implies more revenue than Macy’s
To justify $ 347 a share, our Reverse Discount Cash Flow (DCF) model shows that GameStop must:
improve profit margins to 5.5% (2010-19 10-year average 3.9% and all-time high of 4.8% in 2008) and
Increase gross revenue by 17% annually until 2030 (above expected CAGR of video game industry is 13% by 2027)
GameStop’s historical revenue vs. DCF’s implied revenue: Scenario 1
For reference, GameStop revenue has been down 3% per year from 2009 to 2019.
Still crazy for $ 185
For the current price perspective, we run the same analysis to show what the company must do to justify $ 185 a share:
instantly improve profit margins to 4.8% (2008 all-time high compared to 0.7% in 2019) and
cumulative revenue increase of 15% annually until 2027 (above projected CAGR of the video game industry is 13% through 2027)
In this scenario, GameStop generated over $ 11 billion in revenue by 2027, 19% higher than GameStop’s record $ 9.6 billion in 2012 and Nordstrom’s TTM revenue.
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GameStop’s historical revenue vs. DCF’s implied revenue: Scenario 2
Certainly, stock prices can be irrational
We are not saying that the fundamentals should be 100% of your investment. We are only intended to add insight into the underlying risks of owning stocks at different price levels.
We are not saying that you will not make a lot of money trading stocks. You can. Our aim is to provide some fundamental perspectives to inform and complement other investment strategies. In other words, if you have 10 great technical ideas, you might want to gain weight the best basics and lose weight the weaker basics.
With a better understanding of the fundamentals, investors have a better sense of when to buy and sell – and – know how much risk they take to own a stock at certain levels .
David Trainer is CEO of New construction, an independent equity research firm that uses machine learning and natural language processing to analyze business records and model economic income. Kyle Guske II and Matt Shuler are investment analysts at New Constructs. They do not receive compensation for writing on any particular stock, style or subject. New Constructs does not perform any investment banking functions and does not operate a trading desk. This is adapted from a report titled “Save the investor from Meme Stocks: GameStop. ” Follow them on Twitter@NewConstructs.