Why Its Finally Game Over For GameStop
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shares of gamestop (gme) soared 15% on Thursday after executives announced a 4-for-1 stock split. the next day, the company fired its chief financial officer , a clear warning sign.
Reading: Is gamestop done
for the first time in a year it might be safe to bet against gamestop.
I’ll start with the obvious. short selling is hard work. Getting the fundamentals right is not enough to guarantee trading success, especially when the bet is against the long-term trend of the stock. understanding the general trend is key.
gamestop is a fundamentally flawed business. The company’s 4,573 stores sell new and used video games and merchandise in the United States, Canada, Europe and Australia. Unfortunately, the world of video games has moved on to digital distribution. games are increasingly downloaded or streamed directly from the cloud. There is almost no need for physical games, nor the infrastructure to distribute them. gamestop is an analog business in a digital world.
Bears get it. and yet since 2019 they have been mostly destroyed.
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The dallas, texas-based retailer was in for an epic squeeze in 2021. The stock jumped 1,500% for two weeks in January after so-called meme stock traders on reddit coordinated to target professional sellers in short. cnbc reported that melvin capital, a hedge fund, lost billions.
Losing is commonplace for bears, however, you would never know from listening to the class of experts. bears tell a good story, and their voices gain relevance in the financial media when stock markets are falling. his background tells the real story, and it’s not pretty.
gordon johnson is a prominent tesla tsla (tlsa) bear. has become a go-to source for the bearish view on the electric vehicle maker. Johnson reasoned throughout 2017 that Tesla was doomed and that it’s only a matter of time before the stock crashes. Adjusted for stock splits, the stock was then trading at $56 per share. today ev titan stock is trading at $752.29.
even jim chanos, the famous short seller who predicted enron’s collapse, has a spotty track record. chanos is a gifted analyst with an eye for financial sleight of hand and lousy business models. The 65-year-old founder of Kynikos Associates predicted in 2021 that shares of draftkings (dkng) and doordash dash (dash) were headed for an imminent collapse because they couldn’t make profits at best. both calls went well for the kynikos. however, the institutional investor reported Apr. 2021 that his fund lost 50% of its assets the previous year.
To be fair, share prices are about much more than economics and a strong gut feeling.
Stocks can rise exponentially when investor sentiment is bullish. crowd psychology encourages irrational exuberance, like screaming yourself hoarse at a sporting event, or buying questionable investments, because everyone else is doing it. The inversion adage “when the wind blows hard enough, even turkeys fly” is legit.
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wall street is an accomplice to help.
Analysts at rbc capital markets said in December that doordash shares were poised to outperform the market and were valued at $260. the firm says today that investors should expect no more than $142 over the next 12 months. getting there would be amazing. doordash shares are currently trading at just $74.96. Sure, the lockdowns ended and the global pandemic subsided, but that was predictable in 2021, at least it should have been.
The real change is investor sentiment.
The tailwinds that propelled the stock have turned into headwinds. Investors say they are worried about inflation, corporate profits and the Federal Reserve. but above all, they worry that other investors will continue to sell shares. the exuberance has been replaced by a fearful inertia.
gamestop is still in a very bad position. Firing the CFO CFO when the business is performing poorly usually means an impending crisis. the company has missed its forecast earnings estimates in each of the past four quarters. reported net income in April fell 136.4% year over year, to a loss of $157.9 million.
At the current price of $128.54, the stock could easily drop to $80 or less over the next 12 months.
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