GameStop (NYSE:GME) Stock Gets Extra Life as Short Squeeze Kicks In

On the surface, it could be forgiven for being skeptical of GameStop's (NYSE:GME) chances of survival even before 2020 ran roughshod over retail. Now, however, the company has seen incredible gains in its stock—yesterday the company was up 94% at one point—and briefly stood at a five-year high. What's driving those impressive gains? A combination of several factors is pushing GameStop forward to what looks like recovery.

Gaining Ground on the Technical Side

Yesterday's trading for GameStop was brisk, to say the least. Not only did the company reach an intraday high of $38.65 at one point, but it ended up trading at $31.40. That may sound like a hefty loss of at least potential value, but even $31.40 represents a level not seen since November 2015.

What prompted such a gain? Most point to a short squeeze of surprising depth; a new agreement minted between the company and RC Ventures, an activist investor, saw three new board members added to the roster, a move which helped give GameStop some new life. The new directors all have a substantial background in e-commerce—an especially vital trait these days—as well as strategic planning and online marketing operations.

New board members helped, but GameStop also managed to post some solid holiday sales. Comparable sales for the holiday period—running from about early November to January 2, a nine-week period—were up 4.8% from a year prior. GameStop's saving grace? Online shopping, which racked up a 309% increase over last year's figures. The new consoles certainly didn't hurt, though supply issues from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) didn't allow sales to go as far as they might.

With short sellers smelling blood on the water, short interest actually climbed to 138% of shares outstanding, based on reports from FactSet. However, with the new deal, the company managed to pivot and the short sellers found themselves on the bad end of the deal, reports suggest.

Not So Fast, Say Analysts

The broader analyst consensus, based on our latest research, suggests that the gains seen at GameStop may not be all that reliable. The company has been rated a “hold” for the last six months, and remains one to this very day. Six months ago, the company had three “sell” ratings and five “hold.” That improved three months ago, hitting two “sell”, four “hold” and one “buy,” which is the exact mix we have today.

The consensus price target, though, is well behind the curve. Six months ago, it lingered at $4.03, which represented a 10.43% downside. Now, the price target of $9.79 represents a 68.84% downside, nearly four times what it was a month ago. The last adjustment seen in price target was back around December 9, when Benchmark and Telsey Advisory Group dropped their targets slightly.

Turning Things Around?

GameStop's year in public perception wasn't that great. It fought state-mandated closures tooth and nail in some places, to the point where even the employees objected, especially after GameStop corporate sent out memos telling employees to refuse police orders to be shut down. Instead, GameStop told employees to tell police to instead consult the company's legal department, which attempted to make the case for itself as “essential retail” due to its sales of computer peripherals. Lack of certain protective measures also hit hard, and GameStop not offering sick leave policies—instead telling employees to use existing time off options—didn't help matters much.

Yet it becomes clear that GameStop is working to consolidate and fall back to online options, a point that it likely discovered—like so many other businesses did in 2020—that online retail should have been a lot more robust before it was so clearly needed for survival. The new board members will certainly help on that front. GameStop also benefited from an increasingly stay-at-home market; sitting around your house alone playing video games became one of the safest entertainment options.  An online push would allow the company to get rid of both employees and real estate, a tragic picture for area businesses but a clear help for corporate costs.

For those who have GameStop stock already, count your blessings and hang on to it. Those with an interest in buying in may want to hold off a while until some of the uncertainty surrounding the company fades, like what kind of impact the new vaccines and treatment options will have on COVID-related shutdowns. It seems to be a company in the midst of a major turnaround project, and one that could see it come out better than ever.