There Could Be Another GameStop Short Squeeze, But Beware Weak Fundamentals

GameStop shares have come back to earth since the short squeeze a few weeks ago:

But this story may not be over. GameStop remains one of the most heavily shorted stocks in the entire market:

This tells me that the epic short squeeze could happen again. Many short sellers still have their position. Maybe they’re wary of closing it out for fear their buying would set the stock on another upward tear? (If you’re not familiar with short squeezes, see this post for a brief explanation.)

But Redditors should be careful because the fundamentals of this business are weak. And you don’t want to be stuck holding a rotten stock if the squeeze doesn’t happen.

GameStop has 5,000 stores. Why? Where do you buy toilet paper, pillows, or plates today? Probably online, and videogames are going the same way. Publishers are selling them directly to the public online, and in general, people are losing the habit of going to physical stores.

If you got your games virtually or delivered from Amazon when stores were closed, why would you go back to the store once it’s open? You’ve already been forced to build a new habit by the lockdowns, and people don’t change habits readily.

And let’s not blame the lockdowns for everything. COVID only accelerated an existing trend. GameStop’s business has been shrinking for some time, and losses were actually even bigger in 2019. From Nov 2019 to Oct 2020, sales dropped from $4.3 billion to $3 billion, per their latest financial report.

Management talks about increasing online sales, and has had some very real success in growing that business:

…e-commerce sales, which increased 257.4% and 432.9% in the current quarter and year-to-date periods, respectively, compared to the prior year periods.

But where is the discussion of abandoning all physical stores? Why do those 5,000 stores make any sense in today’s environment? It’s a business model created in another time that made sense then, but doesn’t today.

When one part of your business is growing very fast (e-commerce) and another is producing consistent losses (stores), it’s pretty clear what you need to do. But I don’t see a willingness at GameStop to make those hard choices.

I get the impression management is really trying. When things got really tough in spring 2020, the top executives and the board took big paycuts of 30-50% (generally larger than those taken by hourly staff) and sold the corporate jet. That’s the kind of self-sacrifice you want to see from top leadership in a crisis. But can they bring GameStop to a new business model? I don’t see a lot of evidence of that yet.

Two months ago, before it attracted the attention of Wallstreetbets, GameStop was trading around 15. It could easily return there, based on the fundamentals. Wallstreetbets better hope for that short squeeze, and soon.

P.S. Another big focus for the Reddit crowd has been pot stocks. See more info about why their position is weak, how favorite Sundial Growers may be headed for bankruptcy, and how insiders are taking big loans at Sundial.

P.P.S. Don’t you love that sign?

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Photo: “the Great Hedge Fund Hei$t” by eyewashdesign: A. Golden is licensed under CC BY-NC-ND 2.0

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