I started investing in GameStop $GME about a year ago and the stock price has been very volatile. Where is it going next?
GameStop business is failing as it failed to enter the digital age and competition from Walmart, Amazon $AMZN and Best Buy is growing. But with the new console cycle, the new PlayStation from Sony $SNE and the new XBox from Microsoft $MSFT , GameStop is expected to have higher revenues and free cash flow. GameStop stock is cyclical and whenever new consoles are launch, this is generally good news for GameStop.
Even if the business of GameStop is failing, the company is far from bankruptcy as they have more cash than debt and not much debt to be repaid before the new consoles come out. Currently, the stock is trading under book value and is a prime example of a cigar butt stock.
The amount of free cash flow that GameStop could generate in the next coming year will be more than the current market cap of even enterprise value of the business and they will be able to use this free cash flow to return money to shareholders through buybacks or by paying dividends, both of which will raise the stock price.
GameStop is already using its extra cash to buyback shares and it bought back 35% of shares outstanding in the past year. This can create a second catalyst for the stock, a short squeeze. 82% of the shares outstanding of GameStop are being shorted with over 230% of float. If the stock price of GameStop goes up, the short-sellers will be forced to buy to cover their position, this will make the stock price go even higher. This is called a short squeeze.
There are value activist investors involved with GameStop, Hestia Capital, Permit Capital and Michael Burry. There was even a proxy war between the board and Hestia and Permit Capitals. The hedge funds won. Usually, when activist investors are involved in a company, things get better. They would want to make money. They can make the company return money to shareholders through buybacks or dividends, they can even take it private or look a merger. This is something that even the short sellers will agree to in order to avoid a short squeeze.
GameStop is the riskiest of all my investments but it has taught me a lot as a value investor. For the time being, I'll just hold on the company but I believe that it is still cheap. Its low correlation with the rest of the market $SPx500 also makes it an attractive stock.
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