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.”