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  • Writer's pictureIshfaaq Peerally

GameStop Exit Scenarios

I have been holding GameStop (GME) for more than a year on the basis that the new console cycle was coming and GameStop was massively undervalued and qualified as a cigar butt stock. The company was trading under book value and its cash reserve was bigger than the market cap. However, over this past year, a lot changed in the company. There have been some activist investors such as Michael Burry and recently Ryan Cohen who invested in GameStop. The company bought back 35% of shares. There was a proxy fight in June and now GameStop is one of the most shorted stocks in history and could undergo a short squeeze.

Short squeezes are in the realm of technical analysis and personally, I am a fundamental analyst but this one can't be ignored.

There are six possible scenarios of what may happen to GameStop (both the company and the stock) in the coming months and we need to have a look at each one of them.

  1. Fast Bankruptcy

  2. Slow Bankruptcy

  3. Reboot

  4. Short Squeeze

  5. Pump and Dump

  6. Privatization

Let's look at the Reboot Scenario: How do you reboot a company with a failing business model? One thing you could do is bring more qualified people on the leadership team and the board. A reboot of the company is hard but if done properly, it can make it last multiple decades. I’m not going to speculate about what should be done. This is the job of the management.

Paul Raines was CEO of GameStop from 2010 to January 2018 until he resigned for health issues (he passed away in March 2018). Since then, there has been a leadership crisis at the head of the company as they had 4 CEOs in one year until George Sherman took over in March 2019. CFO Jim Bell joined the team in June 2019.

It is not only the senior management of the company that changed but also the board of directors.

9 out of the 10 board members joined in the last three years. Among the board members we have William Simon, who has been the CEO of Walmart US and Reginal Fils-Amme, who was the COO of Nintendo America, The GameStop that has been in decline since 2008 is no longer the same GameStop today. There are more qualified leaders. The other good news is that the insiders have skin in the game owning about 14% of the company collectively.

Even with these recent changes the leadership of GameStop had to face constant pressure from activist investors. In August 2019, Michael Burry wrote a letter to the board asking them to buyback shares. They heeded to his advice and GameStop bought back 35% of the shares outstanding in less than a year. Recently, Ryan Cohen, the founder of Chewy (who sold Chewy to Petsmart in 2017), bought about 10% of GameStop and he has indicated that he wants to have an active role in the company. James Symancyk, (CEO of Petsmart) and Carrie Teffner (former CFO of Petsmart) are on the board. Is this a coincidence that three people who worked together before are now owners and directors of GameStop or is there some future activism that we can expect?

Earlier this year, there was a proxy fight between the board and two hedge funds, Hestia Capital and Permit Capital, who wanted to nominate two new board members. These two hedge funds owned about 7% of GameStop and they won. During that period, the stock price of GameStop doubled. Was it because Wall Street liked the new board members? No, it was more because shares had to be recalled for the vote and at some point more than 95% of the shares outstanding of GameStop were being shorted. This proxy fight triggered a short squeeze. But this short squeeze is nothing compared to what lays ahead.

Read about the other 5 scenarios on my research partnership:

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