BofA warns GameStop stock could plunge 93% as weak earnings and skeptical recovery plan weigh on company

• GameStop’s epic short-term rally doesn’t change Bank of America’s mind on its long-term outlook.
• The bank reiterated its underperformance rating on the stock, but raised its price target to $ 10 as $ 1.50 in a note on Wednesday.
• “A potential turnaround, helped in part by new board member Ryan Cohen, will not be significant enough to offset structural pressures,” BofA said.
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GameStop’s epic short-term rally sparked by a group of traders who frequent Reddit’s WallStreetBets forum will not change the company’s dismal long-term outlook, Bank of America said in a note Wednesday.

The bank reiterated its underperformance rating on the video game retailer, but raised its price target 567% to $ 10 from $ 1.50 to account for the 1,783% rally in shares since the start. of the year, based on Wednesday’s intraday high. of $ 354.83.

BofA’s price target represents a potential downside of 93% from Tuesday’s close.

BofA admits that a tight supply of stocks is generating gains right now, and high short-term interest combined with strong retail investor enthusiasm could continue to support momentum going forward, according to the note.

But GameStop’s share price “implies EBITDA which is not likely,” BofA said, adding that he remained skeptical of a recovery plan.

This turnaround plan was led by Chewy.com co-founder Ryan Cohen, who acquired a 12.9% stake in the company last year and urged his management team to transform into a retailer. specializing in e-commerce games.

GameStop appears to be buying into Cohen’s plan and added him and two of his associates to its board earlier this month.

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The company has already seen its online sales climb to 30% of its total sales thanks to the pandemic, but Bank of America is not accepting Cohen’s recovery plan.

“We see a higher mix online as a negative factor for profits. Quite simply, the more in-store transactions, the more difficult it will be to sell high-margin second-hand and collectible merchandise which accounted for 46% of sales. in dollars of gross profit in 2019, ”BofA explained.

While momentum may continue to exert upward pressure on equities, GameStop’s earnings should ultimately serve as a reminder that its current valuation is extravagant, according to the note.

“We believe that fundamentals will be factored into the valuation again and note that at the current price of $ 148 and GameStop’s five-year enterprise value of 3.7x, that implies EBITDA of 2, 6 billion dollars against (65) million dollars in 2020 “, explained BofA.

To achieve this valuation, GameStop would need to experience a massive increase in current sales and profit margins, but this is “unlikely” given the higher digital penetration of video game downloads, weakness in high-margin categories like gaming games. opportunity and stability of market share losses compared to the past, the bank said.

For now, investors are avoiding Bank of America’s bearish call on the stock, with GameStop’s shares trading as high as 140% in Wednesday’s trades.

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