GameStop Valuation Analysis January 2021


GameStop Valuation Analysis January 2021

Catalysts

GameStop Valuation Analysis January 2021
  • 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 Valuation Analysis January 2021
  • GameStop stock worth $50/share in bull case

  • GameStop trading above its intrinsic value

GameStop Valuation Analysis January 2021
  • 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

GameStop Valuation Analysis January 2021
  • 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

PDF Version: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/29877336


GameStop Valuation Analysis January 2021

151 views0 comments

Recent Posts

See All