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- GameStop’s epic short-term rally is not changing Bank of America’s view of its long-term outlook.
- The bank reiterated its underperformance rating for the stock, but raised its target price to $ 10 from $ 1.50 in a note on Wednesday.
- “A possible turnaround helped in part by new board member Ryan Cohen will not be significant enough to offset structural pressures,” said BofA.
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GameStop’s epic recovery, brought about by a group of traders who attend Reddit’s WallStreetBets forum, will not change the company’s long-term gloomy prospects, Bank of America said in a note on Wednesday.
The bank reiterated its underperformance rating for the video game retailer, but increased its target price by 567% to $ 10 from $ 1.50 to account for the year-to-date increase of 1,783% to date, based on on Wednesday’s intraday high of $ 354.83.
The target price of BofA represents 93% of the downside potential since Tuesday’s close.
BofA admits that a restricted offering of shares is generating gains now, and the high interest rates combined with the strong enthusiasm of retail investors may continue to support the momentum going forward, according to the note.
But GameStop’s share price “implies unlikely EBITDA,” said BofA, adding that it remains skeptical of a recovery plan.
This recovery plan was led by Chewy.com co-founder Ryan Cohen, who acquired a 12.9% stake in the company last year and asked his management team to become a retailer specializing in e-commerce games .
GameStop appears to be on board Cohen’s plan and added him and two of his associates to the board of directors earlier this month.
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The company has seen its online sales rise to 30% of its total sales thanks to the pandemic, but Bank of America is not believing Cohen’s recovery plan.
“We see a bigger mix for online as a negative factor for earnings. Quite simply, the more business changes in store transactions, the more difficult it will be to sell used goods and high margin collectibles, which represent 46% of the profit dollars gross in 2019, “explained BofA.
While momentum may continue to put upward pressure on stocks, GameStop’s earnings should ultimately serve as a reminder that its current valuation is extravagant, the note said.
“We believe that fundamentals will again be taken into account in the valuation and note that at the current price of $ 148 and GameStop’s 3.7x five-year business value, this implies an EBITDA of $ 2.6 billion versus $ (65) million in 2020 “, explained the BofA.
To grow in this assessment, GameStop would need to experience a huge increase in current sales and profit margins, but this is “unlikely” given the greater digital penetration of video game downloads, weakness in high-margin categories such as used games and constant market share losses compared to the past, the bank said.
For now, investors are putting aside the Bank of America’s downside option on shares, with GameStop’s shares trading up as high as 140% in Wednesday’s trading.
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