One of Wall Street's biggest winners of the day was GameStop, a consumer cyclical company whose shares shot up 8.6% to a price of $43.45, 220.0% above its average analyst target price of $13.58. Shares of the revered "meme stock" have a solid following among the retail crows, but institutional analysts rate it as underperform.
GME outperformed the S&P 500 index by 8.6% today, and by 16.0% over the last year with a return of 9.3% -- so GME investors essentially beat the market. But they also took on a significant amount of risk, and have had to stomach gut wrenching volatility along the way.
Gamestop does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-1.02 and $-6.292. We can see that GME has a forward P/E ratio of -42.6 and a trailing P/E ratio of -6.9.
GME has gross profit margins of 21.5%, from which we can infer that its competitive advantage is probably not absolute, and is facing some pricing pressure from other companies within the same market. Moreover, a successful retail operation such as GME would be expected to have a much higher profit margin.
Looking to the company's cash flows, we see that they are negative at -$572,687,488. Cash flows have been somewhat erratic since 2018, which generally means a business is struggling. But GME's supporters would argue that the business is simply restructuring itself.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Gamestop's P/B ratio indicates that the market value of the company exceeds its book value by a factor of nine, so the company's assets may be overvalued compared to the average P/B ratio of the consumer cyclical sector, which stands at 5.95 as of the second quarter of 2022.
In conclusion, GME does not have much going for it besides they hype. But hype should certainly not be underestimated. George Soros famously stated that markets can remain irrational longer than most investors can remain solvent, so shorting this stock may be just as risky as investing in it. If you enjoyed this article, please subscribe to our free newsletter!
