Catalysts
Catalysts for investment changed since I first started investing in GameStop in September 2019
Right now, the main catalysts for recent prize movement is speculation from Wallstreetbets subreddit
Increase in price forcing shorts to cover position (last data for percent of shares short is at 102% from 30th of December 2020
As of 24th of January 2021, only 2000 shares are available for shorting at borrow rate of 32%
GameStop no longer qualifies as a value stock with current valuation of X30 FCF
Ryan Cohen and two other former Chewy executives joining the board of GameStop expected to change business. No concrete plan yet.
No change in fundamentals to explain recent price gains
Valuation
My personal Biases
GameStop is the largest position in my portfolio at 25% with average buying price of $3.97 (+1500% profits)
Sold about half of my holdings last Friday at $58-$65 range
WSB traders just want to trigger a short squeeze for a quick profit, then move to the next hot stock
More likely to be a pump and dump stock
I believe that Ryan Cohen is smart and has the vision to change GameStop
Hard to value impact of Ryan Cohen without him presenting a clear plan
Assumptions
Estimated $300 million in FCF in 2021
2022-2026 crucial years for GameStop with Ryan Cohen’s activism
More exposure to e-commerce → higher margins
Number of stores from 5000 to 2000 by 2026
Lower revenues but better margin with SG&A costs lowered to $1 billion a year by 2026 from current $1.6 billion
FCF of $200/year in 2022-2026 discounted at 15%
Bear Case
Changes prove to be too costly and fail. GameStop remains physical gaming retailer with failing business
Revenues of $3 billion in 2026
FCF margin of 6%
$200 million in FCF
No future growth
Base Case
Revenues of $3.5 billion in 2026
FCF Margin of 9%
$315 million in FCF
Future Growth of 2% p.a
Bull Case
Revenues of $4 billion in 2026
FCF margin of 12%
$480 million in FCF
Future growth of 5% p.a
GameStop stock worth $50/share in bull case
GameStop trading above its intrinsic value
Best case scenario, GameStop is worth $205/share in 5 years with profits of 25% per year
Downside risk bigger than upside reward at current price
Short Squeeze
Short term gains could continue as short squeeze intensifies
More likely to be a short-term short squeeze (eg. Volkswagen Group in 2008) than a long-term one (eg. RH ongoing from 2016)
Further gains highly probable in the short-term as long as speculators think they can force the shorts to cover
Conclusion
Expensive for now and could go even higher in the short term
Correction to be expected eventually
Hold for investors who bought at a very cheap price, taking profits along the way
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