GameStop shares plunged Wednesday after the long-struggling Grapevine, Texas-based gameseller reported earnings that failed to impress analysts, but the firm’s new ecommerce push prompted one expert to release Wall Street’s most bullish price target, marking the first analyst to say that a turnaround could actually justify GameStop’s meteoric valuation.
Shares of GameStop plunged 32% Wednesday after lukewarm earnings that met analysts’ expectations, wiping out more than $4.5 billion from the firm’s market capitalization, which ended Wednesday at $8.1 billion.
The firm beat expectations with adjusted net income of $90.7 million, or roughly $1.34 per share, but Bank of Analyst Curtis Nagle said Wednesday that the firm’s report missed “in a big way,” citing a large tax credit of $70 million that inflated earnings and cash flow that underperformed his estimate by 66%.
Baird analyst Colin Sebastian, meanwhile, said current prices are being “influenced by external factors” and reflect an “optimistic bright blue sky scenario,” reiterating a neutral rating but upping his price target to $25–one-fifth of current levels.
The flurry of Wednesday analyst notes included some bullishness, however: Jefferies analyst Stephanie Wissink upped her price target to $175 late Wednesday morning–the highest estimate among analysts on Wall Street covering GameStop and about 45% above Wednesday’s closing price of $120.
Lending credibility to the firm’s work in minting a digital transformation focused on ecommerce, Wissink said the quarterly report “reflected the directional changes underway in the business model,” pointing to ecommerce sales that grew a staggering 175% and digital sales that accounted for 34% of revenue in the fourth quarter, versus 30% for the year.
Citing the pivot to digital and valuing the firm as an ecommerce company, Wissink said the firm’s valuation relative to sales should increase if “non-retail streams are realized,” referring to sales of digital goods, accessories and collectibles.
“Our thesis is simply that rebalancing sales away from video game software [and] hardware will deliver superior gross margins,” Wissink wrote Wednesday.
The average analyst price target for GameStop shares is now about $25, or roughly 20% of the stock’s closing price Wednesday. Despite the Wednesday plunge, shares are still up a staggering 600% this year.
“Given the continuation of very challenged results for GameStop, change is needed and soon,” Nagle wrote Wednesday, adding that “very little detail” on a transformation plan was given on GameStop’s fourth-quarter earnings call (executives took no questions). “We continue to be very skeptical on GameStop’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.”
Since the end of January, GameStop’s Reddit-fueled surge has continued with a vengeance and volatility, though it hasn’t again touched its all-time high of $483. The plight of brick-and-mortar retailers hit GameStop particularly hard over the past decade, wiping out nearly 90% of the stock’s gains through the end of 2019. That began to change at the tail-end of last year, as 35-year-old Ryan Cohen, the former CEO and cofounder of booming online pets supplies store Chewy, started buying up shares and lambasting management for “lack[ing] the mindset, resources and plan needed to [help GameStop] become a dominant sector player.” Cohen and a couple of his Chewy colleagues earned seats on GameStop’s board in January and have mounted an effort to usher in a digital transformation and restructuring at the firm, fueling bullishness among Reddit traders expecting the turnaround. So far, the firm has established a committee–with Cohen–to head up the charge and made a slew of executive hires from tech-savvy companies like Amazon, Alphabet and Chewy.