Sources told Charlie Gasparino of FOX Business that hedge funds are concerned that Congress could enforce laws that restrict commercial practices, including short selling.
Behind the increase in GameStop’s shares is the harsh reality of its prospects: the video game retailer is struggling, even with the growth of the surrounding industry.
GameStop has been involved in a battle between very profitable hedge funds betting against it and small investors trying to sustain it. This caused GameStop’s stock price to skyrocket, despite unstable financial data.
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Companies like AMC Entertainment and American Airlines have also seen an increase in shares, but GameStop has been the main battleground between the David and the Goliath. The shares soared 1,600% in the past three weeks, closing at $ 325 a share on Friday and giving GameStop a market capitalization of nearly $ 17 billion. Since then, stocks have fallen. On Tuesday, they fell 60%, closing at $ 90.
Many investors fully understand the contradiction between GameStop’s share price and its business fundamentals. But for those who imagine it will be the next Tesla or Amazon, the truth is: probably not. The company’s quarterly report released in September showed another sharp drop in quarterly sales, as it struggles to adapt to the rise in mobile games and digital downloads that made its more than 5,000 stores obsolete, even more so during the pandemic.
And the media coverage that caught the eye has not brought shoppers back into stores in recent weeks. Customer traffic declined sharply in January, according to a new survey by analyst Placer.ai. In the week ending January 18, the number fell 20.3% compared to the previous year.
Analysts surveyed by FactSet have a “sell” rating on the stock and a target price of $ 13.44 per share. Some analysts believe that a reasonable valuation could end at around $ 20 to $ 30 per share, at best.
Although GameStop’s new board member Ryan Cohen, founder of the online pet store Chewy, has raised hopes of a turnaround, it will still be an uphill battle.
“It is fascinating to watch. But in the end, you can’t escape gravity, “said Scott Rostan, CEO of Training The Street, which teaches financial modeling and assessment to college students and MBAs.” Ultimately, reality is going to settle and, ultimately, the fundamentals are going to have to come play. “
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The Grapevine, Texas-based company was founded in 1984 as Babbage’s and assumed the name GameStop in 2000. It was the destination to pick up the latest video games as soon as they were released. But it has also become the place to exchange old games and consoles for cash or credit to buy new ones.
Sales have fallen in the past decade with the rapid shift towards downloading games. Annual sales have gone from their peak of $ 9.5 billion in fiscal 2012 to the $ 5.15 billion expected for the year ended January 30, according to FactSet.
At a GameStop location in Brooklyn, there were bright settlement notices printed on the front windows. Inside, the shelves were for sale along with a sparse mix of power cords, anime key chains and chosen T-shirts.
Lafayette, USA – December 27, 2016: GameStop Strip Mall Location. GameStop is a video game and electronics retailer IV
Most games were fast with a big discount. Game stacks for the Xbox 360 – Microsoft’s game console that went out of production about six years ago – could be purchased for a quarter, instead of the $ 50 they previously ran.
Carlos Cruz, 33, from New York City, used to visit GameStop once a week to buy new games and exchange old ones. But that stopped a few years ago when he started downloading games. Now he goes to GameStop every two months, specifically to get some exclusive items.
“It’s easier for me to download games at home and not go anywhere,” said Cruz, recalling that 90% of his games are digital.
Xbox Live, PlayStation Network, Nintendo eShop and the Steam online gaming platform allow players to download games. And Amazon is testing the cloud gaming arena with a new streaming service called Luna. Discount companies like Walmart, Best Buy and Target also increased their offerings.
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Meanwhile, the general video game market is exploding, a pandemic-accelerated trend, as Americans stay at home. The global gaming industry was expected to reach $ 174.9 billion last year and reach $ 217.9 billion in 2023, according to analyst Newzoo. This compares to Newzoo’s forecast released during the pandemic’s start of last year of $ 200.8 billion.
There have been some recent positive points for GameStop. The company recorded total sales of 3.1% for the nine-week period ending January 2, but was able to offset the closing of stores with strong demand for the gaming console. Online sales, which accounted for about 30% of the company’s global sales, increased more than three times. And GameStop has reduced its overall debt on its balance sheet by almost $ 600 million since the beginning of 2019.
In mid-January, GameStop added Cohen and two of his former Chewy colleagues to the board after Cohen pressured the company to focus on its online operations.
“GameStop needs to evolve into a technology company that delights gamers and offers exceptional digital experiences – not to remain a video game retailer that prioritizes its physical footprint and stumbles into the online ecosystem,” said Cohen in a letter to the board of directors last November .
By the end of the last fiscal year, GameStop will have closed more than 1,000 stores since mid-2019. It has also added PC games, computers, monitors, game tables and game TVs to its mix. But analysts believe that any turnaround will take time, and some feel that Cohen’s experience leading an online pet store does not apply to the gaming business.
“I think he is a good merchant and a good retailer,” said Michael Pachter, an analyst at Wedbush. “But can you digitally download animal feed or toys? I think not.”
Cohen, whose investment firm acquired a 12.9% stake in GameStop in recent months, declined to comment. GameStop could not be reached for comment.
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Analysts say GameStop could take advantage of the high stock price and make its own share offering, such as American Airlines. The chain could use that money to reinvest in the business.
But in the face of so much uncertainty, the question is: at what price?
“Nobody knows what the real assessment is,” said Alon Y. Kapen, a corporate transaction attorney at Farrell Fritz. “And you don’t know when that window is going to close.”