This GME Stock Forecast article was written by Meiru Zhong – Financial Analyst at I Know First.

Highlights

• GME’s right-sizing business and outstanding performance in the fourth quarter and FY2022 undoubtedly rekindled investors’ confidence. It had a positive net income of $48.2 million in the fourth quarter of 2022, the first quarterly profit in two years.
• GME’s borrow fees are 11.57%, making it the sixth most expensive stock to short, presenting a positive public sentiment towards investing in GME.
• Ryan Cohen, GME’s Chairman, bought 100,000 shares on March 22, 2023, fueling the market’s passion for investment in GME.

Overview

GameStop Inc (GME) offers new and used video game hardware, digital video game software, and accessories through its stores and economic platforms under the names GameStop, EB Games, and Micromania. These products are essentially the same, and the main difference lies in the timing of new product releases by different segments. As of January 28, 2023, the company had a total of 4,413 stores in four geographic segments: 2,949 in the U.S., 216 in Canada, 419 in Australia, and 829 in Europe. The year-end revenue and gross profit in 2022 were $5.927 billion and $1.372 billion respectively, a decrease of 1.38% and an increase of 1.86% over the previous year. Its net loss this year was improved by 17.85%, ending at $313 million.

Reddit Traders Won the 2021 GME Battle

A war between Reddit traders and Wall Street professionals over the value of video game retailer GameStop Inc has rocked the world. The story started on January 20th, 2021. One user in a Reddit forum claimed that the GME stock is undervalued and joked that it’s a good idea to take over the company. However, several big hedge funds were betting the stock price would be going down and shorted the company, turning the joke into reality. Many Reddit users started to buy stocks and call options of the company and forced the hedge funds to close their positions and buy even more stocks of the company. This demand kicked the stock price even higher, causing the stock to soar from $4.99 on January 12th to $86.88 on January 27th – 1641% growth in merely two weeks! Although the share price has since experienced a downtrend and closed around $20.49 on April 21, 2023, we can still say that individual investors beat Wall Street in this battle, causing them to lose a lot of money in a short squeeze. Details can be found in our previous report GME Stock Price Prediction.

Will GME Skyrocket again in 2023?

The 2021 story shows us the surge in GME stock price in a very short period of time, which may be attributed to the psychology behind herd behavior and the anticipation of the company’s business improvement due to the Covid effect. Two years later, people thought it was an accident and a hilarious joke. No one would have thought the show would ever hit the stage again. But is it true? Can we promise that history will not repeat itself?

On March 22, 2023, GME outperformed the market with shares up 35.24% at $23.87, but S&P 500 down 1.65%. After a month’s frustration, the price reached $20.49 on April 21, 2023. Although it dropped a little, the unexpected and abnormal increase still shocked the public and made people wonder. What supported the price growth? Is it a sign to be on board? Let’s unravel the mystery together.

Outperformance Supports Stock Growth

GME released its fourth quarter and FY2022 reports on March 21, 2023. The 10-K shows the company did a great job in upgrading its infrastructure, systems, and online platforms to improve its service quality. Also, it increased operational efficiency by initiating cost-cutting and dedicated to developing the collectibles category for long-term sales growth. The annual growth margin was 23.15% and the net profit margin was -5.28%.

What’s more, the 10Q report in the fourth quarter indicates GME managed its costs and inventory well by showing lower SG&A expenses and reduced inventory, resulting in a positive net income of $48.2 million, the first quarterly profit in two years. The growth margin was 22.45%, the net profit margin was 2.16%, and the current ratio was 1.74. Its right-sizing business and outstanding performance undoubtedly attracted investors and also made the market favor it, leading to a sharp increase in the stock price within a day.

GME Leads Meme Stocks

According to the S3 PARTNERS report on April 12, 2023, GME, as one of the most popular meme stocks, ranks third in short interest, with approximately $1.32 billion. GME’s borrow fees are 11.57%, making it the sixth most expensive stock to short. Its squeeze score was 100, reflecting the significantly higher risk of a short squeeze, that is, short sellers are highly likely to buy stocks at higher prices to cover their short position, pushing the prices even higher. Yahoo Finance also told about 18.62% of GME’s outstanding stocks were shorted by March 31, 2023.

Although GME remains appealing among short sellers, the company continues to be popular with individual investors on some social media platforms. For example, GME was mentioned 728 times on Reddit based on Dillibits. Although the number of comments experienced a downward trend it’s the third most frequently mentioned stock on April 21, 2023. Besides, its stock sentiment score is 63 out of 100, lower than the 30-day moving average, but it also presents a positive public sentiment toward investing in GME.

Insider Trading Moves GME Higher

According to BARRON’S, Ryan Cohen, GME’s Chairman, bought 100,000 shares on March 22, 2023, the day when the price surged by 35.24%. Cohen’s RC Ventures bought the shares at a price between $96.81 and $108.82, with an average price of about $101.76, according to SEC filings and Barron’s calculations. Because of the certain rules set for insider buyers, such that traders need to wait five minutes after the opening and all purchases must be made on the dip, Cohen had to ratchet up his bids to follow the higher price set by others. RC Ventures now owns 9.1 million shares, representing an 11.9% stake, which shows Cohen’s strong confidence in GME’s prospects. The insider trade fueled the market’s passion for investment in the meme stock GME and individual traders kept jumping on board.

Multiple Valuations Forecast GME above 50% upside potential

As GameStop’s annual net income was negative since 2019 and its cash flow was also reported negatively frequently, the P/E and P/CF ratio is not appropriate for valuation. Here we use P/S and P/B to assess a fair price for GME.

The lower-than-average P/S ratio indicates that the company can generate more revenue for every dollar invested, which makes it more attractive than others in the specialty retailers industry. A low P/B ratio also sends the same message, as GME’s stock price is trading at a discount relative to the value of its assets compared to the industry average.

According to CSIMarket and Investing, we compare GME to Amazon.com (AMZN), Best Buy (BBY), eBay (EBAY), and the specialty retailer industry. However, the companies used for these comparisons are actually more mature and perform better than GameStop, so if they were used in a multiple valuation analysis, the results might be overvalued. The analysis in this part is for reference only and cannot be used as an investment basis.

We can see GME market price was $20.49 on April 21, 2023. Using its financial metrics and multiples can give a fair stock price, very close to the actual value. Using its financial metrics and multiples can give a fair share price that is very close to the actual value. When we use different multiples for different companies to calculate the expected price of GME, we can see that the average price based on the P/S ratio is $31.44 with 53% upside potential, while the average price based on the P/B ratio is $95.33, a 365% increase possibility. Although the relative valuation model shows a positive outlook for GME, we should be conservative in our estimates as we mentioned that the results may be somewhat overvalued.

Conclusion

I take a buy-side on GME stock because its fundamental situation has improved and business has steered on the right track, market sentiment is still high, and insider trading shows confidence in its prospects. The multiple valuation methods provide positive investment results and the expected upside potential will be above 50%. We’re not sure whether the 2021 frenzy will happen again this year but we can expect GME prices to climb higher in the near future in a healthy way.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the GME stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

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Please note-for trading decisions use the most recent forecast.