, September 24, 2021

Has GameStop's transformation to digital, proven the retail investor's were right?


  •   2 min reads
Has GameStop's transformation to digital, proven the retail investor's were right?

GameStop releases its latest quarterly results and e-commerce sales rocket; is GameStop’s digital transformation going to prove the short investors were wrong and little investor’s right?

Proposition: there are three types of investor:

  • The bull — who is naturally optimistic, might invest  in companies like Tesla; and rarely shorts stocks. The bull believes in technology, exponential technology and the power of digital transformation
  • The bear — who is naturally pessimistic; possibly reckons inflation is around the corner; thinks there is one massive bubble; and may well short stocks
  • The person who buys into companies that sell products that they like — for want of a better description, I will liken this type of investor to Warren Buffett
  • Come to think of it; I believe there is a fourth type too, which kind of combines all three; acknowledges we might see a stock market crash, but says, “Hey, sometimes bubbles can be good.” This philosophy will be described in a separate article.

Robinhood steals from the rich and gives to the poor except when the rich are hedgefunds say traders

With GameStop, we saw bearish institutional investors short the company. Their rationale was simple; the pandemic would hit the company hard, and that video game physical retailing was dying; the future was Amazon.

When the 'little' old retail investor started betting against the short investors, I thought it was a game: “Let’s teach the big guys, the bullies, a lesson!”

But maybe they just knew something; perhaps a lot of video gamers made up their number, and they had a sense, a Warren Buffet type sense, that the GameStop shorters were wrong.
The company saw new income hit $80.5 million in its latest quarter, announced on March 23rd.

More to the point, online sales surged 175 per cent, taking global —commerce sales at GameStop to 34 per cent of the company’s net sales in the quarter. In the same quarter in 2019, online sales accounted for 12 per cent of net sales.

In other words, GameStop has seen some digital transformation, which, as was proposed above, is a concept bears don’t get.
Of course, there is a lot of generalisation here: some investors can flip from bulls to bears, but there might be something in the proposition that investment bears are not big technology advocates — and sometimes, of course, they are right.

What next for GameStop?

The company had $635 million in cash and restricted cash at the end of 2020, and throughout the year, the company reduced overall debt by $57 million.

Not so long ago, GameStop’s valuation was around $600 million. For a company that has just made $80.5 million in net income in one quarter, that feels like an extremely low valuation. But the shorters reckoned they knew something and behaved as if they thought the company would go bust.

Maybe the retail investors just understood something that had escaped the bears.

On the other hand, GameStop is now valued at $12 billion, and that does seem on the high side — but at 36 times annualised quarterly profits, maybe not at ridiculous levels. Only time will tell.

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