What Is GameStop Really Worth?
Believe it or not, there are real-world financials to consider.
State of play
In all the recent market mania, it might be easy to forget that there’s an actual company at the center of the frenzy. Here’s a quick look at the real-world prospects for GameStop, which begins the week with a market cap of more than $20 billion, up from $1 billion at the start of the year.
Running the numbers. GameStop’s annual sales peaked at nearly $10 billion before falling to $6.5 billion in its most recent pre-pandemic fiscal year. It has recorded a loss in eight of its past 10 quarters.
The biggest challenge. Gamers can now easily download their games directly instead of going to a store. That means GameStop needs to find a use for the more than 5,000 stores it operates. It could downsize, and it’s been trying, but this is expensive and difficult; unwanted retail properties are flooding the market. And shrinking to grow has not proven a path to retail greatness. In truth, few specialty retailers have turned their business around in the face of technological disruption. (Best Buy is an exception.)
The biggest opportunity. Analysts point to recent strength in GameStop’s digital business over the holidays, and an upcoming refresh cycle for gaming consoles, as cause for optimism. Even so, it’s hard to justify its sky-high valuation: Its price-to-sales ratio is nearly the same as Amazon’s. Analysts’ average price target for the stock is just over $13 per share; in premarket trading today, the stock is at $300.
“There’s no reason that stock should be where it is,” Bruce Cohen, co-founder of the retail advisory firm CH Consulting, told DealBook. “That is just a stock manipulation exercise.”
Why it matters. When investors get valuations wrong, “capital goes to less productive companies at the expense of companies that would have used it better,” said Eric Gordon, a professor at the University of Michigan’s Ross School of Business. This notion has not necessarily been tested by GameStop yet, which would have to raise funds at its current valuation, as other companies have done during the past year’s market rises.
The “biggest risk,” according to Lynn Turner, a former chief accountant of the S.E.C., is that people stop putting money in the markets “because they think it’s turned from investing into betting at a craps table.”
Gapping down
M&A news:
- DD -10.8% (DuPont announced it is completing today the merger of IFF and Nutrition & Biosciences; has concluded the strategic review of its Non-Core businesses)
- HZNP -1.0% (Viela Bio to be acquired by Horizon Therapeutics (HZNP) for $53.00 per share in cash)
Other news:
- CNCE -50% (Phase 2 clinical trial to evaluate CTP-692 as an adjunctive treatment in patients with schizophrenia did not meet the primary endpoint or other secondary endpoints)
- NNOX -8% (received additional information request from FDA in connection with its review of Nanox.ARC)
- VXX -5.7% (trading lower in response to rebound in US futures)
- EXPR -5% (continued volatility in pre-mkt)
- GME -1.9% (continued volatility in pre-mkt)
- ALRN -1.6% (files for 9 mln share common stock offering by selling shareholders)
- ID -1.1% (files for 30,206,509 share common stock offering by selling shareholders)
Analyst comments:
- GSX -3.8% (downgraded to Underweight from Neutral at JP Morgan)
- GOGO -3.1% (downgraded to Underweight from Neutral at JP Morgan)
- CMBM -2.1% (downgraded to Mkt Perform from Outperform at Raymond James)
- FTI -2.1% (downgraded to Hold from Buy at Berenberg)
- PSO -1.3% (downgraded to Sell from Buy at UBS)
- WSM -0.7% (downgraded to Sell from Neutral at UBS)
Gapping up
In reaction to earnings/guidance:
- TPB +3.8%, OTIS +2.9%, TMO +1.4%
M&A news:
- VIE +53.3% (to be acquired by Horizon Therapeutics (HZNP) for $53.00 per share in cash)
- THCB +44.2% (Microvast to list on Nasdaq through merger with Tuscan Holdings; Expected to be listed on the Nasdaq under the ticker symbol MVST following an anticipated transaction close in the second quarter of 2021)
- IFF +17.2% (to complete the previously announced merger of IFF and DuPont's (DD) Nutrition & Biosciences business, pursuant to a Reverse Morris Trust transaction today)
- HOLI +7.8% (confirmed it received a revised unsolicited consortium proposal to acquire all the outstanding shares of Hollysys for $17.10 per share)
- ASPL +6.3% (Wheels Up plans to become publicly-traded via SPAC merger with Aspirational Consumer Lifestyle Corp - to be listed on the New York Stock Exchange)
- KMDA +5.9% (entered into an agreement for the acquisition of the plasma collection center and certain related rights and assets from the privately-held Blood and Plasma Research)
Select Index ETFs showing early strength:
- QQQ +1.2%, IWM +1.2%, SPY +1.1%, DIA +0.8%
Other news:
- EXK +28.1% (grants Ridgestone Mining option to purchase Guadalupe y Calvo Project)
- GRTS +21.8% (files for mixed securities shelf offering, no amount given) API +21.3% (agrees to $250 mln private placement)
- AMC +18.1% (continued volatility in pre-mkt)
- DVAX +17.3% (Dynavax and CEPI announce $99 million in funding for CPG 1018 adjuvant manufacturing to support the global COVID-19 response; also, Dynavax and Clover announce planned global Phase 2/3 efficacy trial of adjuvanted COVID-19 vaccine candidate)
- ARQT +17.3% (reports topline results from pivotal DERMIS-1 and -2 Phase 3 trials of topical roflumilast cream)
- EH +17.2% (receives $40 mln investment from Carmignac)
- MBRX +14.7% (signed an agreement with Catalyst Clinical Research to manage its US clinical trial to study the ability of Annamycin to treat soft tissue sarcoma (STS) that has metastasized to the lungs)
- SRNE +14.2% (reports fourth patient also released from hospital following third infusion of stem cells)
- NVAX +10.4% (report that the co expects to produce up to 150 mln vaccine doses monthly by May or June, according to Reuters)
- SPCE +9.5% (provides flight test program update; new flight window set for VSS Unity rocket-powered flight from New Mexico)
- SMTS +8% (appoints Jose Vizquerra Benavides as Chairman)
- MICT +7.1% (has secured a significant follow-on purchase order of 5,000 SmartCam units, valued at approximately $1.5 million)
- ENG +6.4% (files for $100 mln mixed securities shelf offering)
- SAII +6.3% (Otonomo to list on Nasdaq through a business combination with Software Acquisition Group Inc. II )
- KSMT +5.7% (Nexters Global, the owner of Blockbuster Mobile Game Hero Wars, to go public via merger with Kismet Acquisition One)
- XPEV +5.3% (Jan deliveries)
- TLRY +4.5% (received the necessary approvals and market authorization in accordance with the Portuguese legislation to offer Tilray medical cannabis products in Portugal from its GMP-certified EU facility in Cantanhede, Portugal)
- KOSS +3.9% (continued volatility in pre-mkt)
- DPW +3.9% (to resume bitcoin mining at energy efficient facility with 1,000 S19 pro antminers from Bitmain)
- ARLP +3.6% (reported financial and operating performance for the quarter ended December 31, 2020)
- NIO +3% (Jan deliveries)
- BB +2.8% (continued volatility in pre-mkt)
- GDOT +2.5% (Starboard Value raises stake to 9.9% from 8.3%)
- GNOG +2% (Tilman Fertitta enters into deal to take Golden Nugget/Landry's Public)
Analyst comments:
- SB +11.5% (upgraded to Buy from Hold at Stifel)
- RCII +6.2% (upgraded to Overweight from Sector Weight at KeyBanc Capital Markets)
- PAGS +5.2% (upgraded to Overweight from Neutral at JP Morgan)
- RGS +5.1% (upgraded to Buy from Hold at Loop Capital)
- OLN +4.4% (upgraded to Overweight from Neutral at JP Morgan)
- HAL +4.3% (upgraded to Overweight from Neutral at Piper Sandler)
- NKLA +3.5% (upgraded to Neutral from Underperform at Wedbush)
- TSLA +3.1% (target raised to a Street-high $1200 from $515 at Piper Sandler)
- NEXA +2.9% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
- SNDR +2.8% (upgraded to Overweight from Sector Weight at KeyBanc Capital Markets)
- UBSI +2.3% (upgraded to Outperform from Mkt Perform at Raymond James)
China’s Snowballing Winter Sports Scene
With just a year left to go before the Beijing Winter Olympics, China has officially caught the ski bug.
CHANGBAISHAN, China — A phalanx of skiers formed at the bottom of the slopes at the Wanda Changbaishan resort, clutching their poles close to their sides as they waited as long as 20 minutes at peak times to hop onto the lifts. Not far from it, there was another queue for the magic carpet ferrying up not a line of children, but mostly adults who were about to take their first shaky snowplows in the nursery.
Not exactly blessed with the most ideal conditions for the sport, China ranks far down the list of global ski destinations. Its mountains lack the exciting steep drops seen in Europe, the waist-deep powder days in Japan, and temperatures in the northeast, where most of China’s ski resorts are clustered, are harsh. They hover around minus 10 degrees Celsius (14 degrees Fahrenheit) in the day and dip to minus 30 degrees Celsius (22 degrees Fahrenheit) or below at night — also meaning that for much of the season, there is little natural snowfall.
But, no matter. With just a year to go before the Beijing Winter Olympics begins on Feb. 4, 2022, and the COVID-19 pandemic keeping the populace within the nation’s borders, skiing and other snow sports have reached a fever pitch.
Pushed heavily by the government, the Chinese are picking up skis and snowboards and heading for the slopes in record numbers. By 2022, the ski market is expected to be $3.97 billion, a nearly fivefold increase from 2015, according to a 2019 report by the EU SME Centre. Grand investments have been made into improving resort facilities and accessibility — linking key areas like Chongli, the site of next year’s games, by high-speed rail to downtown Beijing in under an hour — and providing subsidized lessons and equipment for students across large swathes of the country.
In December, Prada for the first time organized a ski trip for a number of its VIPs in China, taking place over three days at the Wanda Changbaishan resort. Among them, Linda Li, a TV anchor and former model, who remarked how she’d never seen such energy for skiing before in China.
“I remember when I was skiing 10 years ago in Megève, France,” she said. “I was the only Chinese there and skiing was not very popular in China back then. But this time, I really felt people’s enthusiasm for skiing in Changbaishan.”
A skier like Li, who can carve gracefully down the mountain, is not so common on China’s slopes. Although lines for the green runs in China are formidable, advanced skiers can have their pick of mostly empty black pistes.
As to be expected with an entire nation picking up snow sports nearly from scratch, wipe-outs are common and slope etiquette can be wanting. According to the Ski Industry White Book, the number of domestic skiers in 2019 totaled 13.05 million, of which 72 percent are first-timers. When it comes to après, it is hot pot over hot chocolate.
“As a holiday lifestyle, it’s really just starting,” said Sandy Ip, who founded The Ski Project, a high-end multibrand snow apparel retailer that opened its newest location at the resort to host next year’s games. With stores also in Hong Kong, Shanghai, Niseko, and Bangkok, The Ski Project focuses on carrying luxury and more niche brands including Fendi, Chloe, Goldbergh and Perfect Moment. “It used to be the really hardcore Chinese skiier that goes to Xinjiang or Yabuli [in Harbin province] to ski for one week. They don’t care about what to eat or where they stay. It’s no longer about that.”
“In the past, the Chinese were either really good Olympian-level because they were part of a sports team or you just don’t ski at all,” said Ip. “This year is the year that everyone is going skiing, the growing middle class. It’s particularly this year.”
China’s ski resorts are located most notably in Hebei province, which encircles Beijing, as well as in the northernmost reaches of the country in Jilin and Heilongjiang. There’s also some skiing out west in Sichuan. Further out, Xinjiang provides China’s best natural snow in places such as Koktokay, although realistically hitting Japan — in a typical year — is more easily accessible to the majority of Chinese urban dwellers than is Xinjiang.
Snowboarding brand Burton was a relatively early mover in the space. The company started selling in China in 2003, biding its time and building up relationships to prepare for the explosion of the market.
“That day is finally here with a vengeance,” said Craig Smith, Burton China chief executive officer. “Our business this season to next season will be up 90 percent.”
Now in charge of 10 Burton stores across the country, he stated that their network could grow to a “couple dozen or a couple hundred in the next five years, depending on how well we do in educating the market.”
Smith, who witnessed the expansion of the Japanese market pegged to the Nagano 1998 Winter Olympics, believes there are a lot of similarities to Beijing 2022.
“The growth that Burton saw from Japan from 1997 to 2000 — sales tripled in those three years — just exponential growth at that time,” said Smith. “It’s that same customer, the twentysomething that has access to the financial resources for the sport, because it is expensive.”
While on one end of the spectrum there are brands like Burton, The North Face, and Anta Sports-owned Arc’teryx that underscore performance, there are others that emphasize more of a fashion proposition, including nonendemic brands trying the market. For instance, Mackage, the Montreal outerwear brand famous for its figure-hugging down parkas, rolled out its ski line in China for the first time in November.
“We treated this year as a small test with very strong sell-throughs,” said Eran Elfassy and Elisa Dahan, the cofounders of Mackage, adding that they “anticipate to at least quadruple our investment with an expansion into men’s.”
“There is a strong appetite for novelty, lighter colors, superior tailoring for flattering silhouettes which has been our brand’s strong suit,” the founders noted about China. Top sellers tend to be their signature styles, indicating that “the need to still have brand recognition on the slopes is just as strong,” they said.
The fashion statement element is also a strong driver at Fusalp. The Annecy, France-headquartered brand is a heritage outfitter to the French national ski team but perhaps taking a page from Moncler, which has seen huge success with its frequent designer collaborations, believes the bigger opportunity lies in city and après.
Fusalp CEO Alexandre Fauvet shared that around two-thirds of the company’s sales in China come from ready-to-wear versus true technical products, compared to an even split in the U.S. and Europe. Even with the benefit of time, he doesn’t believe that the ratio of sales in China will evolve to match Western markets.
China’s natural landscape may have its limits, Fauvet acknowledged, but he said it matters less than one might expect in cultivating a passionate culture around snow sports.
“I give you the example of the U.K., which doesn’t have any mountains, or very few in Scotland, but they are fantastic skiers, even in competition,” he said.
In the same way that most avid British skiers head to nearby France, Switzerland or Italy to ski rather than their own country, he believes that Chinese are likely to pick up the snow vacation. Initial learning and also warming up for each season can be facilitated on local mountains but Chinese will easily adapt to heading abroad for time in the snow.
“I myself would be in Europe or Japan usually to ski right now,” said The Ski Project’s Ip, “but it’s such an emerging sport there will always be beginners that will want to learn locally.”
Once international travel resumes, Smith said, Japan, with its unparalleled snow and proximity to China, will be critical in connecting with the Chinese snow enthusiast. South Korea, which hosted the Pyeongchang 2018 games, will also have a role to play, but Smith believes to a lesser degree, as well as traditional ski outposts in the U.S. and Europe.
“For Korea, they’ll go for the secondary factor. They go over for the food and culture and shopping first and might tack on some time in the mountains,” he said.
Convinced that this is merely the start of a long-lasting lifestyle around the snow, Smith said, “It’ll be up to us to ensure the trend continues but the Olympics are going to be a huge promotion for the snow industry, and the huge investments at the resorts in China are unfathomable in size.”