At the end of the day GME’s stock price will not escape the gravitational pull from…
GME reported its fiscal year Q4 and full-year numbers this past week. Q4 was a disaster for the Company. Operating earnings were trounced 75%% YoY for the quarter from $75.2 million last year down to $18.8 million. After subtracting interest expense, which rose in 2020, pre-tax net income plunged 84.5%. Across the board, the Company badly missed consensus estimates for revenues, gross margin, operating profit (87% miss) and net income.
Some of you may have seen the headline report that GME earned $1.23 per share in Q4 2020 vs 38 cents in Q4/19. But the net income number in 2020 includes a $69.7 million non-cash GAAP tax “benefit” whereas in 2019 the GAAP non-cash tax expense was $43.8 million. That’s why it’s “cleaner” to analyze operating and pre-tax numbers. While hardware sales (game consoles) increased 20.5% YoY for the quarter, software sales plunged 26%. Game consoles are only marginally profitable. The “juice” in the business is with software sales.
Recall that the founder of Chewy.com (CHWY), Ryan Cohen, took a 13% equity stake in GME in the fall of 2020. He seems to believe that he can successfully transform GME’s business model into an e-commerce “digital” operation from the brick/mortar model. The video game business has largely moved online and competition in the software side of the business is fierce. Microsoft has now jumped into the arena with full force. Perhaps Ryan should focus on trying to make CHWY profitable instead of trying to breathe life into a dead corpse. CHWY’s operations lost over $250 million in FY2020. It has never made money. Over the last 2 years CHWY lost over half a billion dollars. Chewy is literally a cash-burning Weimar furnace.
With respect to the operational “reboot,” the Company’s earnings conference call lasted only 20 minutes and there was not a Q&A session, which is unheard of. At the same time, Jefferies’ stock analyst raised his price target on the stock from $15 to $175, which is absurd. But that sordid upgrade from Jefferies made sense when the 10K was released and it contained a disclosure that Company started evaluating whether or not to increase the size of the ATM stock sales program (ATM = At The Market, which allows the underwriter to sell shares on behalf of the company at any time during market hours).
Jefferies is GME’s main investment banker and is a sleazy firm. It also happens to own a large portion of GME’s shares. Recall the Jefferies was the underwriter of Hertz’s ATM stock sale program that was cut off by the SEC. Outside of Jefferies, every other stock analyst that covers GME has a price target that ranges from $5 to $33.
GME reported its numbers on Tuesday after the close. It’s stock tanked 33.7% on Wednesday from $181 to $120 and closed just below its 50 dma. On Thursday the stock snapped back $63 up to $183. I have not found a reasonable explanation for this beyond the narrative that Reddit traders took the Jefferies stock price target seriously. More likely the already high short interest soared on Wednesday and the stock underwent a “gamma” squeeze. I’m certain Jefferies helped that process along and here’s the evidence of a gamma squeeze:
Note the the 37.2k call option volume at the $200 strike on the March options that expired Friday. It was by far the largest volume for any call or put option for any month. When that amount of calls are sold by market makers, they are forced to buy a certain amount of shares to hedge out their short call exposure, which drives the stock price higher.
GME is trading purely on technicals: short squeezes fueled by intense gamma squeezes and hedge fund algos and retail traders chasing momentum. The stock careened off its 50 dma on Wednesday (yellow line) and flirted with either side of the 21 dma on Thursday and Friday.
I do believe GME is going lower (the RSI and MACD show the potential for the stock to go much lower) though sell-offs could be followed by sharp short-squeezes. The technical action reminds of Tilray (TLRY), on which I eventually hit a home run on my puts after first “investing” with a series of small losses. If you pull up a chart on TLRY that goes back to July 2018, you’ll see a “bungee jump” pattern that is similar to the GME chart above. At the end of the day GME’s stock price will not escape the gravitational pull from failing fundamentals.