GameStop Stock Is Tumbling
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GameStop Stock Is Tumbling

Because its earnings report mattered after all.

By Connor Smith
Thu, Mar 25, 2021 4:42pmGrey Clock 3 min

GameStop stock was falling fast on Wednesday after the company’s fiscal fourth-quarter results disappointed analysts. There’s also another elephant in the room: The company is considering selling more stock, which could dilute its shares.

GameStop stock (ticker: GME) closed down 33.8%, at $120.34. The S&P 500 index fell 0.6%, while the Dow Jones Industrial Average ended flat.

In a filing with the Securities and Exchange Commission, GameStop said it has been evaluating whether or not to increase the size of its previously announced $100 million at-the-market stock-sale program. The company had announced the ATM program in December, with Jefferies acting as the sales agent. The company said it didn’t sell stock as its valuation surged.

GameStop stock received a mix of downgrades, price target cuts, and raises from analysts following the report. “Many on Wall Street have wondered why GameStop has not done an ATM transaction to take advantage of the elevated share price,” Telsey Advisory Group analyst Joseph Feldman wrote. “The answer may be that its balance sheet is in great shape, with cash and cash equivalents of $635MM (incl. restricted cash of $110MM) and debt of $363MM at the end of 2020. The new commentary seems to be a signal that an ATM transaction could be on the way.”

Heading into Tuesday, Feldman had the highest price target listed by FactSet. He lowered his to $30 from $33, calling the event “anti-climactic.” On the flip side, Jefferies analyst Stephanie Wissink raised her target by 1,066% to $175. That’s the new Street-high, in case there was any doubt.

Wissink argued the moves by Chewy co-founder and GameStop board member Ryan Cohen to transform the company into more of a technology firm warrant a completely different valuation method. The company’s earnings release was paired with another trio of hires with e-commerce backgrounds, including Amazon alum Jenna Owens as its next chief operating officer.

Wissink wrote that she moved from basing her target on earnings before interest, taxes, depreciation, and amortization, or Ebitda, to a sales multiple that factors in a shift to e-commerce.

She also makes the point that GameStop has the potential to participate in the rise of non-fungible tokens, or NFTs, and the hosting of shoppable content streams.

“As a result, we expect store closures to persist & sales to transfer to dot com,” Wissink wrote. “Total revs may come down, but value per dollar of sales should increase if non-retail streams are realized.”

S&P Global Ratings analysts Mathew Christy and Andy Sookram wrote in a note on Wednesday that they believe the turnaround will involve sizable execution risks and possibly a material increase in its capital investment.”The recent increase and volatility in GameStop’s share price have not affected our fundamental view of its business or the risks the company faces,” they wrote. “However, we note the potential financial flexibility afforded by its improved equity market standing if it chose to raise additional capital to reposition its business or reduce its debt.”

BofA Global Research analyst Curtis Nagle maintained his $10 price objective and Underperform rating. He notes that while GameStop’s adjusted earnings per share of $1.34 beat his estimate for $1.22, he notes that the beat was driven by a large tax credit during the quarter. The company’s Ebitda came in short of his expectations by 66%.

“We continue to be very sceptical on GME’s efforts to address its long standing issue of digital disintermediation and the fact that its core market in new and pre-owned physical console gaming is shrinking at a rapid pace,” Nagle added. “GME also called out leveraging its existing digital assets like its PowerUp rewards program but this has seen declining engagement for years.”

Wedbush analyst Michael Pachter lowered his rating on GameStop to Underperform from Hold, but raised his price target to $29 from $16. While he still thinks GameStop is well-positioned to benefit from the new consoles from Sony and Microsoft, he says the short squeeze has spiked the stock to “levels that are completely disconnected from the fundamentals of the business.”

“Our downgrade isn’t a reflection of our opinion of company management, which remains very high; rather, it appears that the ‘real’ value of GameStop shares (the price willing buyers are prepared to pay in the open market) vastly exceeds the ‘fundamental’ value we believe investors expecting a financial return can reasonably expect,” he wrote.

 

Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: March 24, 2021



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The 7 lasting impacts of COVID for Australian investors

A leading Australian economist says two years on, the long term implications of COVID for the economy have emerged

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AMP chief economist Dr Shane Oliver says the effects of the pandemic continue to reverberate across the world, with seven key lasting impacts leading to a more fragmented and volatile world for investment returns”.

Perhaps the biggest impact is that the pandemic related stimulus broke the back of the ultra-low inflation seen pre-pandemic,” said Dr Oliver. Together with bigger government and reduced globalisation, this means a more inflation-prone world. So, a return to pre-pandemic ultra-low inflation and interest rates looks unlikely.

Here is a summary of Dr Oliver’s explanation of the seven key lasting impacts of COVID for investors.

1. Bigger government

The pandemic added to support for bigger government by showcasing the power of government to protect households and businesses from shocks, enhancing perceptions of inequality, and adding support to the view that governments should ensure supply chains by bringing production back home. IMF projections for government spending in advanced countries show it settling nearly 2 percent of GDP higher than pre-COVID levels.

Implications for investors: likely to be less productive economies, lower than otherwise living standards and less personal freedom.

2. Tighter labour markets and faster wages growth

After the pandemic, labour markets have tightened reflecting the rebound in demand post-pandemic, lower participation rates in some countries and a degree of labour hoarding as labour shortages made companies reluctant to let workers go. As a result, wages growth increased, possibly breaking the pre-pandemic malaise of weak wages growth.

Implications for investors: Tighter labour markets run the risk that wages growth exceeds levels consistent with two to three percent inflation.

3. Reduced globalisation

A backlash against globalisation became evident last decade in the rise of Trump, Brexit and populist leaders. Also, geopolitical tensions were on the rise with the relative decline of the US and faith in liberal democracies waning ... The pandemic inflamed both with supply side disruptions adding to pressure for the onshoring of production [and] heightened tensions between the west and China we are seeing more protectionism (e.g.,with subsidies and regulation favouring local production) and increased defence spending.

Implications for investors: Reduced globalisation risks leading to reduced potential economic growth for the emerging world and reduced productivity if supply chains are managed on other than economic grounds.

4. Higher prices, inflation and interest rates

Inflation [due to stimulus payments to households and supply chain disruptions] is now starting to come under control but the pandemic has likely ushered in a more inflation-prone world by boosting bigger government, adding to a reversal in globalisation and adding to geopolitical tensions. All of which combine with ageing populations to potentially result in higher rates of inflation.

Implications for investors: Higher inflation than seen pre-pandemic means higher than otherwise interest rates over the medium term, which reduces the upside potential for growth assets like shares and property.

5. Worsening housing affordability

the lockdowns and working from home drove increased demand for houses over units and interest in smaller cities and regional locations. As a result, Australian home prices surged to record levels. Meanwhile, the impact of higher interest rates in the last two years on home prices was swamped by housing shortages as immigration surged in a catch-up. The end result is now record low levels of housing affordability for buyers

Implications for investors: Ever worse housing affordability means ongoing intergenerational inequality and even higher household debt.

6. Working from home

There are huge benefits to physically working together around culture, collaboration, idea generation and learning but there are also benefits to working from home with no commute time, greater focus, less damage to the environment, better life balance and for companies lower costs, more diverse workforces and happier staff. So the ideal is probably a hybrid model.

Implications for investors: Less office space demand as leases expire resulting in higher vacancy rates/lower rents, more people living in cities as vacated office space is converted, and reinvigorated life in suburbs and regions.

7. Faster embrace of technology

Lockdowns dramatically accelerated the move to a digital world. Many have now embraced online retail, working from home and virtual meetings. It may be argued that this fuller embrace of technology will enable the full productivity-enhancing potential of technology to be unleashed. The rapid adoption of AI will likely help.

Implications for investors: a faster embrace of online retailing at the expense of traditional retailing, virtual meeting attendance becoming the norm for many and business travel settling at a lower level.

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