Opinion: GameStop’s share price is down 50% from highs, and it’s still insane

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It was not worth owning GameStop above $ 45 a share, given the company’s fundamentals, as explained when we closed our focus list: long position in the stock at the end of January. However, GME stock, -0.07%, rose as high as $ 347, even higher intraday, before taking a rollercoaster ride back to around $ 185.

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Sources: New Constructs LLC and company files

To give readers an idea of ​​how insanely overvalued the stock was at its peak, we did the math and showed how the company would have to perform to justify a $ 347 share price. UndefinedCrazy ”to $ 347 explained: It implies more revenue Macy’s To justify $ 347 per share, our reverse discounted cash flow (DCF) model shows that GameStop must: improve its profit margin to 5.5% (2010-19 10-year average is 3.9% and maximum was 4.8% in 2008) and increase revenue by 17% compounded annually through 2030 (above the video game industry’s projected CAGR of 13% through 2027) In this scenario, GameStop raises nearly $ 21 billion in revenue in 2030 or more than Macy’s M revenue in the last 12 months (TTM), -2.52%, AutoZone AZO, -1.26% and Chewy CHWY, + 3.97%. Historical GameStop Income vs. DCF Implicit Income: Scenario 1

Sources: New Constructs LLC and company files

For reference, GameStop’s revenue fell 3% compounded annually from 2009 to 2019. Still insane at $ 185 To get perspective on the current price, we ran the same analysis to show what the company needs to do to justify $ 185 per share: immediately improve your profit margin. to 4.8% (all-time high in 2008 vs. 0.7% in 2019) and increase revenue by 15% compounded annually through 2027 (above the video game industry’s projected CAGR of 13% through 2027) In this scenario , GameStop achieves more than $ 11 billion in revenue in 2027, which is 19% higher than GameStop’s record revenue of $ 9.6 billion in 2012 and Nordstrom JWN’s TTM revenue, -3.14%, Advance Auto Parts AAP , -0.35% and Chewy. Historical GameStop Revenue vs. DCF Implicit Revenue: Scenario 2

Sources: New Constructs LLC and company files

Read: ‘Optimism Has Huge Risks’: Why New Investors Excited About The GameStop Roller Coaster Should Rethink Their Pink Glasses Light, Stock Prices May Be Irrational We’re Not Saying Fundamentals Should Be The Same 100% of your investment process. Our sole objective is to provide information on the fundamental risk of owning stocks at different prices. We are not saying that you will not make a lot of money trading stocks. Could you. Our goal is to provide a critical perspective to inform and complement other investment strategies. In other words, if you have 10 great technical ideas, you may want to overweight those with the best fundamentals and underweight those with the weakest fundamentals. With a better understanding of fundamentals, investors have a better idea of ​​when to buy and sell, and they know how much risk they are taking when they own a stock at certain levels. Now Read: GameStop To Retire Some Debt Before ‘Strengthening Balance Sheet’ Plus: Ryan Cohen, 30-somethings, Consolidating Power At GameStop, And The Reddit Crowd Applauds … But Stocks Are Regular David Trainer Is The CEO of New Constructs, an independent equity research firm that uses machine learning and natural language processing to analyze corporate presentations and model financial returns. Kyle Guske II and Matt Shuler are investment analysts at New Constructs. They are not compensated for writing about specific actions, styles, or topics. New Constructs does not perform any investment banking functions and does not operate a trading desk. This is adapted from a report titled “Saving Investors From Meme Stock: GameStop.” Follow them on Twitter @ NewConstructs.