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Michael Pachter can’t seem to go out of the house without getting quizzed about something.
GameStop.
For nearly two decades, the Wedbush Securities analyst has followed the videogame store. Everyone now wants to talk about GameStop, he says, from waiters to the woman giving him a Covid-19 shot. He says, “It’s the only stock any of them has ever heard of.”
In February, Pachter, 65, who joined Wedbush in 1997, thought the frenzy around GameStop (ticker: GME) was winding down. With shares falling from highs of over $400 in January, the analyst didn’t see the need to change his Hold rating or $16 price target. The stock dropped to the mid-$40s before rising again. Since February 25, GameStop’s stock has been consistently above $100, and it recently traded above $200. On Wednesday, GameStop closed at $214.14, up 1.5 percent. So far this year, the stock has gained 1,036.6 percent. Analysts whose price targets averaged around $13 at the start of February were perplexed by the viral squeeze that drove GameStop shares into triple digit territory. Short sellers, who sell borrowed shares in the hopes of benefitting by purchasing them back at a cheaper price, are keeping GameStop stock inflated, according to Pachter, as they tango with a fervent group of retail investors who congregate on social media sites such as Reddit. After seeing their losses on paper pile up, he assumed the short sellers would have given up. He was mistaken, as were the analysts who covered stocks like
AMC Entertainment Holdings is a company that produces movies.
(AMC),
BlackBerry
& (BB)
Bed Bath & Beyond is a retailer that sells home goods.
(BBBY). Research analysts are scratching their heads about how to do their job as these so-called meme stocks ride a roller coaster propelled by Reddit comments, short seller interest, and options trading. What good is a “Hold rating” if your target price for the company is a multiple of where it is currently trading? As the market values of meme stocks climbed to previously unheard-of heights, analysts produced research notes for clients that were all but meaningless, no matter how well-reasoned they were. GameStop’s volatility, according to Pachter, can’t be upgraded and downgraded every day. “You won’t be able to relocate your target that quickly.” The discrepancy between the stock price and fundamentals prompted Curtis Nagle, a BofA Securities analyst, to work with a data team to investigate what internet discussion could signify for GameStop shares. They discovered that GameStop stock was fluctuating in lockstep with spikes in Reddit forum conversation. Many people, including Nagle, have stopped covering the story since then. Only three analysts, including Pachter, have given the stock a recommendation. “Momentum and social media are now part of Wall Street’s strategy, and they are in a better position than retail to participate in, sniff out, and instigate gamma squeezes in the options market,” says investor Michael Burry. Burry, 50, declared a long position in GameStop in 2019. His negative bet against the housing market before of the subprime mortgages collapse was highlighted in the book and movie “The Big Short.” It was a value investment at the time, but GameStop was trading for about the same price as a McDonald’s Happy Meal. Burry sold his GameStop stock for a profit in the fourth quarter of 2020. He now sees connections between the dot-com bubble and the 2007 financial crisis. In an email to Barron’s, he said, “Back in 1999, everyone making money in dot-coms felt it would continue.” “In 2007, everyone who was making money by using numerous properties to leverage their money expected it would continue. I’m not sure when meme stocks like these will crash, but I don’t think we’ll have to wait long because I believe the retail audience is completely invested in the theme, and Wall Street has followed suit. We’re running out of fresh cash to get on the bandwagon.” Shares of GameStop had risen when Chewy co-founder Ryan Cohen disclosed that he had purchased a stake in the company and urged on it to close shops and focus on digital operations. Cohen is now the chairman of the board of directors. According to Joseph Feldman of Telsey Advisory Group, GameStop was already doing this. Before the jump in late January, Feldman, one of the few remaining analysts with a Buy rating, believed the market was underestimating the influence of new videogame systems from Sony and Microsoft.
Sony Corporation
(SONY) along with
Microsoft
(MSFT). He explains, “There was a basic reason why we felt better about GameStop.” “We also appreciated that the management team was implementing improvements that were centered on efficiency and profitability, as well as a shift toward digital—all of those wonderful things. The stock immediately went crazy.” The stock soared after Cohen and two associates joined the board of directors. At the time, the number of shares available for trading outnumbered the number of shares sold short. Short sellers may rush to cover their positions in response to sudden price changes, raising demand and driving stock prices rising. A number of meme stocks have experienced short squeezes, and are now being targeted by ordinary investors due to large volumes of short selling. When GameStop’s stock rose to $65, Telsey’s Feldman rated it to Underperform. He couldn’t justify a goal over the mid $30s, despite his optimistic assessment of the company’s digital comeback. While the stock of GameStop attracted a lot of attention from the media, Feldman claims the opposite was true for institutional investors. On June 7, he ceased coverage. “Our key clientele, institutions, have little interest in it,” he continues. On Monday, Baird analyst Colin Sebastian took a break from his Neutral rating and $25 price target, at least until management reveals its new business strategy. He claims that as an analyst, he is responsible for forecasting free cash flow generation and determining the stock’s intrinsic value. Sebastian acknowledged that GameStop is rapidly transitioning from in-store to online videogame sales, but he believes that “share price volatility is more closely tied to nonfundamental trading, social media influences, and other factors that make it difficult, at least in the near term, to make a reasonable stock rating recommendation to institutional investors.”
Prices that are out of whack aren’t the only issue. After GameStop fans hounded him and his family for indicating the company was poised to decline, activist short seller Andrew Left stopped posting short papers in January. Pachter, for one, says he doesn’t pay much attention to the online discussion, but he did once come across an online user who suggested he should be hanged for having a sell rating on GameStop. “No one is shorting GameStop because of what I said,” says Pachter. “They’re shorting GameStop because they think it’s worth $40 or $50, not $200. They don’t need to hear it from me.” Despite big changes to its board of directors and executive team, as well as a recent stock sale that raised $1.1 billion, Pachter claims that Cohen has yet to offer a road map for actually reforming GameStop. GameStop has stated in a proxy statement that it intends to invest in technology and grow its product line in order to become the go-to e-commerce platform for gamers, but analysts like Pachter want more details, such as financial targets. He downgraded the company to Underperform, but raised his target price to $50, which is more than $150 more than where it is now. Connor Smith can be reached at connor.smith@barrons.com./n
