Investors would be forgiven if they stayed away during momentum stocks in the early part of last year. At that time, Wall Street Bets (WSB) calls took over the markets, and once forgotten stocks soared to all-time highs.
At the center of the WSB community was Gamestop (GME), a multichannel video game, consumer electronics, and services retailer. All but left for dead in mid-2020, Gamestop was the poster child for the WSB movement.
The company soared from a low of below $4.00 in 2020 before reaching an all-time high of $483.00 per share in early 2021. It is now trading at ~$95 per share and is sitting on losses of ~35% year to date.
At the moment, the company still remains wildly overvalued. The company hasn’t been profitable since 2018, and while it did post a smaller net loss year-over-year in Fiscal 2021, Game Stop is still bleeding cash. While fundamentals have me bearish, overall, I am neutral on the stock.
Fundamentals vs. Potential
So why neutral if the fundamentals have me questioning the investment thesis? For starters, WSB has changed the game. Those who form part of this crowd are remarkably resilient, and given what they’d proven capable of, it is not a stock I’d bet against. It is one I certainly wouldn’t be shorting.
That being said, the main reason why I see a glimmer of hope is thanks to a report by the Wall Street Journal on a potential shift to GameStop’s business model.
Before I jump into that, it is important to understand the gaming company’s current model. GameStop sells new and second-hand video game hardware, physical and digital video game software, and video game accessories, mainly through GameStop, EB Games, and Micromania stores and international e-commerce sites, including www.gamestop.com, www.ebgames.com.au, and www.micromania.fr.
The company has two main business segments: Video Game Brands and Technology Brands. The Technology Brands segment sells wireless products and services and operates Spring Mobile managed AT&T and Cricket Wireless branded stores, along with the Simply Mac business.
As you can imagine, since games can be purchased via the cloud, the need for physical game copies is on the decline. That makes buying/selling used games also a dying market.
Traditional investors have been waiting for GameStop to do something in response to the changing industry. To date, the company has released little information on its strategy, but if the report from a couple of weeks ago has merit, there is a glimmer of hope.
A Shift to Web 3.0
The WSJ reported that GameStop intends to launch an NFT platform as part of a major turnaround effort being led by Chief Executive Matt Furlong. The company is looking to also invest in crypto companies that are currently building blockchain play-to-earn (P2E) games and NFTs. In effect, it is looking to shift its business model to take advantage of Web 3.0.
The pivot would be a notable one and makes GameStop one to watch. P2E gaming has exploded, and consumers are becoming more attracted to games in which they get to physically own, benefit and trade from in-game items, avatars, and land, which come in the form of NFTs.
Thus far, the traditional gaming market hasn’t quite ventured into Web 3.0 gaming. However, if GameStop can be the bridge that connects these two industries together, there is real potential for a turnaround.
The company is not without competition, as Coinbase (COIN) is also expected to launch its NFT platform soon, and there are other major private players in the space. However, GameStop has something none of these others have – it has a direct line to the existing gaming community.
Wall Street’s Take
Turning to Wall Street, GameStop earns a Moderate Sell consensus rating based on two Holds and two Sell ratings.
The average GameStop price target of $34.00 puts the downside potential at 63.7%.
Conclusion
While the company has yet to comment on the report, I’d expect the company’s share price to react favorably to any news that would confirm this direction. GameStop still remains a highly speculative play, but the potential of this proposed new direction could be just the catalyst this company needs.
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