Gamestop Corp. (GME) came onto a lot of investors' radars thanks to Dr. Michael Burry's August 2019 announcement that he was long the struggling video game retailer.
Burry enjoys a wide following within the investment community thanks in large part to his starring role in Michael Lewis's book the "The Big Short," which chronicled the lone wolf hedge fund manager's winning bet against the housing bubble in the lead-up to the Great Financial Crisis. Given his reputation for taking out-of-the-box positions that pay off, it is unsurprising that many investors perked up when they caught wind of Burry's latest contrarian call.
Burry's public bullishness undoubtedly helped to power GameStop's upward run in 2020, as many analysts and commentators continue to reference his bet on the name. Yet, for all their determination to link Burry with GameStop and its bull run, his actual investment thesis has largely failed to play out the way he said it would, in my opinion.
The Big Short's long bet
According to Burry's initial announcement, he considered GameStop to be unfairly beaten down thanks to the painful confluence of a heightening of investor fear over streaming competition and a cyclical bottom in the video game retail sector:
"The streaming narrative dovetailing with the cycle is creating a perfect storm where things look terrible. [But] it looks worse than it really is... We're at low tide on the cash balance. The balance sheet checks out for me."
I highlighted the key points of Burry's long thesis shortly after it was made public. In essence, Burry concluded two main things. First, he considered the market's fears about rising competition from digital and streaming game platforms to be overblown. Second, Burry believed GameStop's future cash flow potential was being unfairly discounted due to short-term slowdowns driven by the aging generation of consoles. According to Burry, GameStop was poised for a cyclical upswing in 2020 and 2021, when the next generation of consoles was scheduled to hit the market. Consequently, Burry concluded that the company should start returning cash to investors.
Right for the wrong reasons
It took some time for that thesis to play out, but play out it did as, almost exactly one year after Burry made his initial call, GameStop took off on an absolutely epic bull run.
GameStop shares were selling for $4.01 apiece when the market closed on July 31, 2020. By Dec. 31, they were worth $18.84, a 370% surge in just five months. GameStop owed this epic run to a number of factors, including Burry's successful efforts to compel the company's board to initiate a new stock buyback program. Also important was the long anticipated release of the new generation of gaming platforms, as a surge of console and "Triple A" game sales promised to juice up revenues.
However, Burry's prescription for GameStop's ailments did not account for the Coronavirus, nor did it consider the crippling effect that such a pandemic would have on the retail industry.
The company's rapidly growing e-commerce business offered a way out to the pandemic crisis. GameStop's expanded presence in the e-commerce space has also served to alter investors' perception of the company, which is now increasingly viewed – and valued – as an e-commerce play, rather than a cyclical value stock.
Paging Dr. Burry
In my August 2019 review of Burry's original thesis, and of GameStop's investment potential more broadly, I concluded that the name, even after its jump in the wake of Burry's call, represented "a solid short-term valuation play." Having surged more than 1,500% since then, thanks in large part to the epic short squeeze as the stock's upward run began clashing with the biggest percentage of short positions in the U.S. stock markets, I fear that is no longer the case.
GameStop has undergone a fundamental transformation over the course of the last year. Once an attractive "cigar butt" value play, it is now an e-commerce story stock with a valuation to match. Given that he has had the opportunity to watch the company's evolution from the vantage point of an "almost insider" since 2019, Burry is surely aware that his original bull case has been superseded by the e-commerce narrative, but he has thus far demurred to update his thesis publicly.
Burry's months-long public silence on GameStop appears to have failed to worry the many investors who continue to reference his past comments as justification for their bullish positions in the name. Remarkably, even the fact that Burry sold 38% of his position in the third quarter has also failed to deter GameStop bulls from using his name as a sort of rallying cry for the stock.
My verdict
From the perspective of its fundamentals, GameStop certainly no longer looks much like the solid but undervalued business that Michael Burry first championed. That may well explain his decision to reduce his exposure to the name in the third quarter. Whether he has further lightened up his position since then remains to be seen.
I think that if Burry has not yet sold out of his entire position, he would be wise to do so now before the effects of the short squeeze wear off. Indeed, I see that as the most prudent move for any investor still holding GameStop.
Disclosure: No positions.
Read more here:
- David Einhorn: Passive Investing Is Not Passive Anymore
- GameStop: Epic Short Squeeze Offers Ideal Exit Opportunity
- Seth Klarman: The Federal Reserve Has Killed Price Discovery
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