The GameStop (GME) short squeeze shenanigans are by now a crossover story plastered all over the mainstream news. With all the hoo-ha surrounding it, it is easy to forget that at the center stands a company faced with a somewhat uncertain future and in search of a new identity.
Baird analyst Colin Sebastian says the latest developments could accelerate a decision to pursue a new direction. But what are the options? Sebastian splits the possibilities into 4 different outcomes. Let’s have a look at these potential scenarios.
The Bright Blue Sky Scenario
“Essentially,” Sebastian says, “This outcome contemplates GameStop successfully transitioning to a primarily digital model while retaining video game market share, preserving its used business, and diversifying into new services (e.g., game distribution platform, tournaments/events).”
Simply put, this means the company gets rid of most of its physical footprint, moves the business online, thereby saving on expenses which translates into higher margins.
The Blue Sky Scenario
This is basically a watered-down version of the option above; GameStop morphs into a “dual-track online/offline model,” foregoing only “modest share” of its retail video game business, retaining some of its hold on the “console cycle” while diversifying its business with new services.
The Grey Sky Scenario
This appears to be Baird’s current outlook for the company, which suggests a growing focus on “faster e-commerce growth,” yet keeping the present character of the business intact with some store closures and a “slower/gradual rollout of new services.”
The Storm Cloud Scenario
The bear thesis which has shadowed GameStop for years, and obviously not an avenue to pursue but one the pessimists think is in the cards. This paints GameStop as an irrelevant dinosaur with a fast-approaching expiry date as its core fanbase will eventually fade and consumers “shift to digital downloads and abandon the used market over the next 2-3 years.”
So, what does Sebastian ultimately think is in store?
“Based on the company’s recent track record and ongoing secular trends,” the analyst concluded, “We assign a 5% probability to our Bright Blue Sky scenario, 15% for our Blue Sky scenario, 65% for our Grey Sky (base case) scenario, and 15% for our Storm Cloud scenario.”
All this suggests a “valuation closer to $20 per share.” However, Sebastian refrains from going that far and has a $13 price target for the shares. The implication for investors? A brutal 89% drop from current levels. Additionally, the analyst’s rating stays a Neutral (i.e. Hold). (To watch Sebastian’s track record, click here)
The Baird analyst is not the only GME pessimist. The stock has a Moderate Sell consensus rating based on 4 Holds and 2 Sells. The consensus projection is for ~90% downside, given the average price target currently stands at $11.50. (See GameStop stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
