GameStop Melt-Up Leaves Wall Street Price Analysis in Shambles

(Bloomberg) -- To see how far GameStop Corp. has outrun anyone’s ability to render sensible analysis, consider what its dizzying rally has done to Wall Street’s best guesses of its value.

Perched at $65 a share, hoisted by a short squeeze ignited and arguably organized in chat rooms, the stock has soared $53 above the average forecast of equity handicappers tracked by Bloomberg. The ratio between the two is by far the biggest in the Russell 3000 and jumped Friday, as crazed trading capped a stretch in which the 37-year-old game retailer burned bears who had shorted 140% of its shares.

It’s happening in a stock that before 2020 had fallen six straight years as earnings shrunk, and which isn’t projected to turn a profit before fiscal 2023. While fundamentals may one day matter again, for now GameStop has become the latest and greatest show of force by newbie day traders in a market that seems more like their plaything each day.

“It doesn’t make business sense,” said Doug Clinton, co-founder of Loup Ventures. “It makes sense from an investor psychology standpoint. I think there’s a tendency where there is heavy retail interest for those types of traders to think about stocks differently than institutional investors in terms of what they’re willing to pay.”

Right now, they’re willing to pay 426% more than what analysts consider reasonable, on average. While perhaps fairly priced relative to its annual sales of about $5.2 billion in the 12 months through October, those sales are down 40% in just two years. The company is expected to report a per-share loss in both fiscal 2021 and 2022. To get a price-earnings multiple it’s necessary to look two years into the future, where the P/E is around 58.

And that’s before the possibility of further gains: the stock more than doubled to $136.63 in U.S. premarket trading on Monday, before paring the advance. It traded at $93.80 as of 5:25 a.m. in New York.

While Wall Street may have no clue what GameStop shares are worth, it does have ideas on what the company should do with them: sell.

“GameStop can issue equity and should sell stock to pay down debt,” said Wedbush Securities Inc. analyst Michael Pachter, who had a price target of $16 for GameStop as of Jan. 11. Doing so would involve “minimal dilution at these levels” and provide protection against an economic downturn. “They should do as much as the market will absorb,” he said.

Whatever the future holds, the recent past has been a bonanza for anyone who dared own the stock -- or, even better, bullish options. Calls expiring Jan. 29 with a strike price of $60 were the most-traded GameStop contract on Friday, soaring 11-fold. Other similar wagers had correspondingly heady gains as contracts once seen as long-shot upward bets suddenly were in the money.

“It has become a cult stock because of Ryan Cohen’s success with Chewy,” Pachter said, referring to the activist investor and co-founder of online pet retailer Chewy Inc., who joined the GameStop board this month. “I cannot discount Mr. Cohen’s past successes and don’t know what he has in mind going forward, but I need to see their strategy before I give them credit for materially higher earnings power.”