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GameStop Keeps Bouncing Back

GameStop Keeps Bouncing Back ($GME)

GameStop’s value is in the same neighborhood as Robinhood Markets. It’s a fitting match, given that the free trading app drew ire from retail investors after it restricted trading in GameStop shares amid January 2021’s meme-stock run.

GameStop investors that have held on to the stock can thank Chewy co-founder Ryan Cohen, whose activist stake in 2020 helped propel GameStop shares from a market value low of around $180 million on April 3, 2020, to where it trades today. Cohen and two associates joined the board in 2021, which helped kick off GameStop’s run as a social media darling.

Does that mean Cohen has accomplished his goal of transforming the firm into a growing tech company? Not exactly. There’s widespread skepticism of GameStop stock among institutional investors. The firm’s platform for nonfungible tokens, or NFTs, hasn’t gotten much traction. Sell-side analysts have mostly dumped coverage of the stock due to the volatility or lack of interest from clients. There aren’t enough analysts covering the stock to form a true consensus forecast for the coming quarters.

Though cost cuts and stronger holiday sales led to a profitable fiscal fourth quarter, the April quarter brought more losses.

GameStop’s leadership has been a revolving door. CEO Matt Furlong was fired last week, which sent the stock tumbling until Cohen and two of his associates bought the dip on Friday. Furlong was the third departure among a trio of former Amazon execs who joined GameStop in 2021 to help turn things around. Furlong wasn’t named or thanked in the press release announcing his firing; Cohen was named as executive chair. That day, Cohen tweeted “Not for long,” an apparent jab at Furlong’s name.

GameStop declined to comment about Furlong’s firing and what its declining sales mean for the company’s turnaround efforts.

Through it all, GameStop stock is still hugely popular in some corners of the internet, including Reddit, which is home to the WallStreetBets forum that rallied around the stock during its initial run. Some devoted investors are still holding on to shares in hopes of a turnaround, or at least a short squeeze.

While much of Wall Street has abandoned its coverage of the stock, one analyst has stuck around for the long haul. His long tenure hasn’t won him any fans in the GameStop investment community: Michael Pachter of Wedbush has been covering the retailer since 2002 and has maintained a bearish Underperform rating on the stock since March 2021. Pachter’s $6.20 price target looks out of step given where the stock has traded since early 2021. But Pachter says he’s not backing down.

Barron’s recently talked to Pachter about the state of GameStop, his thoughts on covering it, and what comes next. Here are highlights of our conversation with Pachter.

Barron’s: What do you make of how the CEO firing was handled?

Pachter: I don’t care if you hated the guy, just put his name in the press release and say he’s leaving the company, effective immediately. And then thank him for his contributions and wish him well. That’s just what you do.

Did you see Cohen’s tweet?

“Not for long.”

I was restrained when I retweeted it and said ‘This reflects his character.’

What was the point of humiliating Matt Furlong? What did he do, other than salute Ryan Cohen and try to implement his ideas? He didn’t do a good job.

You’re one of the few analysts still covering GameStop.

I will say that most of the buy-side interest in the stock has dried up, and by that I mean all of the long interest—I can’t even name an institution that’s long the stock—and most of the short interest, because of what happened to Melvin Capital. They just got burned so badly.

There have been a handful of short sellers that have come out of the woodwork…And I think the thesis has always been the same on the short side: it isn’t worth anything.

I think the shorts are getting emboldened, that what happened to Melvin really can’t happen again, because it would take billions and billions and billions of capital long to cause the squeeze. So they’re kind of staying the course.

So my job has changed from when I used to talk to people who looked at both sides of the stock, to all shorts. Not very many of them, probably a dozen or so. Everybody that I talk to now, they are not looking for a fundamental understanding of the business because they understand that unlike dog food [from Chewy], you can digitally download games.

GameStop is toast if [Cohen] can’t figure out a way to survive. The unspoken strategy was ‘Be like Amazon!’ and he brought in three senior Amazon people. OK, now, they’re all gone. What happened? ‘Not for long!’ They’re all gone. Now what? What’s he gonna do? The general counsel is gonna fix it?

Have you thought about dropping coverage of GameStop?

Not for a second. I ride Sells to zero, unless I change my mind like Netflix. GameStop was the first retailer I covered.

So GameStop, I had a Buy for almost the entire 2002 to 2017 period, then I downgraded to Neutral in 2017. The Sell didn’t happen until the stock ripped, but now it’s fun.

Some of GameStop’s most devoted fans have a reputation for angrily confronting the company’s skeptics. Do you get any of those threatening emails, letters, and tweets?

Yeah. Nothing that is actionable or FBI threatening. Just like venomous, petty stuff.

Have you ever had an in-person encounter with GameStop’s retail investors?

I’ve probably talked to a couple of dozen GameStop retail investors. But just like all internet trolls, they’re timid little kitties in person. I’ve never had a GameStop investor, who knew who I was, say anything rude to my face.

They would try to rationally explain to me why they thought it was going up. And I’d be like, ‘Well, what do you think they’re gonna sell?’

‘Well, NFTs!’

And I’m like ‘Why them? Why not somebody else?’

And I’m not suggesting that there won’t be an NFT marketplace, and somebody will thrive, and it could be them. But why them? It just makes no sense.

And by the way, the big disconnect between them and reality is if Ryan Cohen actually thought it was worth $10 billion, why didn’t he buy 100% of the company? He could have bought 100% of the company for $600 million. And if he really believes it is worth $10 billion, why didn’t he do that?

I think he bought it at two to sell it at five, you know, and then all of a sudden, it was at 100. And he didn’t know what to do.

He is the dog that caught the speeding car. And now he’s clamped onto the bumper, and the car is still speeding at 75.

How often in your day, do people ask you about GameStop, still?

Maybe five to 10 times a month.

Mostly around the news events?

Yes. And the shorts don’t need me to tell them how bad GameStop is. But they’ll call intraquarter, just to ask how we’re seeing things track, or how a big game did.

Looking at the stock, it really feels like we’ve been in this holding pattern ever since 2021. It’s held up well above the expectations of short sellers.

The reason stocks go down is there’s more sellers than buyers, right? We know that there is zero institutional holding of GameStop. In a normal market, where 50% of a stock is owned by institutions, if the stock is underperforming their expectations, they sell it and the stock drops.

In this situation, it’s 100% owned by retail investors. Nothing makes them sell. GameStop missed, the CEO got fired. They don’t care.

What is the catalyst for shorts? It’s not like they’re going to immediately run out of money.

If they can kind of manage the quarters to $40 million losses, which I think they can, then they’ve got 30 quarters; they’ve got six, seven years. But the question is, in a year, do digital downloads grow by enough so their losses go to $80 million? And in two years, do digital downloads grow to where their losses are $120 million. If we go from $150 million a year in losses to $300 million, to $500 million, then people are gonna see that they run out of cash in 2026. And they’re gonna freak out. Because the value will keep going down.

They just need a few sustained quarters of losses. And again, I don’t know how he’s running the company, he ballooned up SG&A, and then he trimmed it. Is he spending money in the right places? I don’t know. And he got rid of the guys who understood what they were doing. So I don’t know. So we’ll figure it out. But I think this is a few years to zero. I don’t think it will be soon.

What do you say to people who point to your price target?

I don’t care. It’s worth what I think it’s worth. And if you disagree, then pay more. I don’t understand, like Jay-Z’s $200 million house in Malibu. Like, you can’t build a house for less than $200 million? That’s crazy. But that’s what he thought it was worth. It’s worth what people want to pay for it. And I don’t care what people say. Stocks don’t hit your price target all the time.

Do you enjoy covering GameStop? Is it fun for you?

Totally. I enjoy covering all the stocks I cover. The more controversial, the better. They’re really fun. I enjoyed covering Netflix when I was wrong for 10 years.

My favorite of all the stocks that I cover is Activision, because I really do understand their business. I understand the legal issues with antitrust. And so I can be an expert in a way that helps investors make decisions.

With GameStop, you don’t have to be an expert to say digital downloads are increasing. And they don’t have any out.

Thanks for your time Michael.

Write to Connor Smith at connor.smith@barrons.com