Today, at 12 p.m. EDT, we encourage you to join us in the “Massive Equity Gains from the Strategic Buyers’ Market: Powered by a Wall of Debt” event.

During this event, Professor Joel Litman, Chairman and CEO of Valens Research, will talk about a strategic opportunity in one sector that we think will benefit from Corporate America’s upcoming rush to raise capital.

Register here to know how you can navigate the risks and opportunities in equities that the upcoming debt crisis will bring.

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In late 2020, GameStop (GME) was trading at about $18 per share, suffering from the shift to digital sales and the impact of the pandemic.

In January 2021, a collective effort by Reddit users on r/wallstreetbets to initiate a “short squeeze” caused the stock to skyrocket to $483/share, drawing global media attention.

Despite finishing the year at $150/share, the stock’s momentum faded without new catalysts, declining by 85% to around $12 (split-adjusted).

GameStop, under chairman Ryan Cohen, is attempting to pivot towards e-commerce to adapt to industry changes but faces challenges due to its reliance on physical sales and ongoing significant losses.

The company has closed over 780 stores since 2020 in a bid to cut costs.

The future remains uncertain, with profitability and a successful business model transition still in question.

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In late 2020, GameStop’s stock (GME) was trading at around $18 per share after a difficult year for the business.

The global pandemic accelerated the shift to digital game sales and led to temporary store closures. This placed further pressure on GameStop’s core model of physical retail.

In January 2021, users on the subreddit r/wallstreetbets noticed that over 100% of GameStop’s shares had been shorted, meaning more shares were short than actually existed.

They decided to launch a “short squeeze” by collectively buying shares to drive up the price and force short sellers to close positions at a loss. This led to an astronomical rise before the split, with GameStop peaking at $483/share.

The massive surge in trading volume drew global media attention.

In the following months, GameStop saw wild price swings as momentum traders exited and hedge funds covered short positions. However, the stock found a solid base of support among retail investors inspired by the movement.

GameStop finished 2021 at around $150/share, still up dramatically from late 2020 levels.

As is common after a hype or short squeeze ends, GameStop’s price gradually lost momentum and reverted closer to underlying value. After stock went down 85% from its top, GameStop traded around $12 (split-adjusted price).

Without new catalysts, market forces pulled the price down as short-term speculators exited.

Under chairman Ryan Cohen, GameStop is trying to pivot more towards e-commerce and digital offerings to adapt to industry shifts.

However, progress has been slow and the business is still heavily reliant on declining physical sales. Significant losses continue to be reported as the company invests in its transformation.

To cut costs, GameStop has been aggressively closing underperforming stores. Over 780 locations have shuttered since 2020.

While necessary, this further damages the brand and same-store sales. It also highlights the difficulties of pivoting a brick-and-mortar business fully online.

Our EEA shows that to justify the current price, the company has to turn profitable and reach a 6% Uniform return on assets (”ROA”), which doesn’t look that likely.

Sustained profitability and cash flow positive operations are still uncertain given headwinds.

While retail traders have delayed GameStop’s downfall, the fundamental challenges facing its business model persist.

Maintaining investor interest and successfully transitioning remains an uphill battle.

Unless strategic changes can reverse losses and generate consistent profits, further share price declines may be inevitable over the long term.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research