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John Engle
John Engle
Articles (610) 

GameStop: Epic Short Squeeze Offers Ideal Exit Opportunity

While still too dangerous to short, the high-flying video game retailer is clearly overvalued

January 23, 2021 | About:

Gamestop Corp. (GME) has started off 2021 strong. Its stock has surged ever higher, continuing the epic rally that began last autumn. The video game retailer, long out of favor with a market that seemed to view it as nothing more than a niche brick-and-mortar retailer, has been reborn as an e-commerce darling.

However, GameStop's transformation has not convinced everyone. Indeed, there is a growing chorus of analysts and commentators who believe GameStop's rally is wildly overblown - it is the most-shorted stock in the U.S., after all.

New narrative, new valuation

GameStop has gained steam thanks in large part to the rapid growth of its e-commerce distribution channel, with online sales surging 309% according to the company's holiday sales report. Before last year, few analysts anticipated that GameStop would make a big move into e-commerce. Yet, as the old saying goes, "Necessity is the mother of invention." With its traditional brick-and-mortar sales channel severely disrupted by the pandemic, GameStop needed another way to sell its products.

E-commerce now accounts for a whopping 34% of GameStop's sales. This powerful trend appears to have convinced the market that GameStop is no longer just a niche player in the declining brick-and-mortar retail space, but rather a viable e-commerce platform in its own right.

The announcement of a board refresh earlier this month has served to further reinforce the market's new way of looking at GameStop. The three new board members are e-commerce industry veterans, including Chewy Inc. (CHWY) co-founder Ryan Cohen. GameStop surged on the news and has not yet stopped to catch its breath.

Surging stock squeezes shorts

Not everyone has been convinced by GameStop's new story, however. A number of short sellers have sought to highlight the dislocation between the company's historical financial performance and its newly bulging market capitalization. On Jan. 19, Citron Research's Andrew Left, a widely followed short seller, offered a particular harsh assessment of investors still on the long side of the trade:

"GameStop buyers at these levels are the suckers at this poker game. Stock back to $20 fast."

Thus far, the short sellers' warnings have been matched only by market optimism. This resulted in the stock jumping more than 70% in a single day as renewed optimism began forcing short positions to close en masse. The resulting spiral was a short squeeze of epic proportions - the more short positions closed, the higher the stock went, forcing yet more short positions to close.

The way I see things, there is no way to justify GameStop's current $4.5 billion valuation, even for those who liked the stock before the short squeeze. But shorting a story stock is rarely a recipe for success, a lesson the GameStop bears have had to learn the hard way. I suspect, as S3 Partners' Ihor Dusaniwsky predicted on Jan. 22., that the latest squeeze will "force both older and newer shorts to reconsider their conviction in this trade—more than likely, the short trades will be killed off with no chance to respawn."

Best to bail on the bull bounce

Ultimately, while the short side looks dangerous, the long side is no more appealing to me. With nothing but narrative and speculative frenzy to keep its high-flying stock price aloft, I see little justification for buying GameStop. Moreover, I believe current shareholders would be wise to head for the exit, as the short squeeze selloff is almost certain to come next.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

Rating: 5.0/5 (2 votes)



Appspopo7 - 2 months ago    Report SPAM

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