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GameStop’s stock rise doesn’t hide its reality

ap photo Pedestrians pass a GameStop store on 14th Street at Union Square Thursday in the Manhattan borough of New York.

NEW YORK — Behind GameStop’s stock surge is the grim reality of its prospects: The video game retailer is floundering even as the industry around it is booming.

GameStop has been swept up in a battle between big-moneyed hedge funds betting against it and small investors trying to prop it up. That has caused GameStop’s share price to soar despite the shaky financials underneath.

Flailing companies like AMC Entertainment and American Airlines have likewise enjoyed a stock surge, but GameStop has been the primary battleground between the Davids and the Goliaths. Shares rocketed 1,600 percent in the last three weeks, closing at $325 per share on Friday and giving GameStop a market cap of nearly $17 billion. Shares have since cratered. On Tuesday, they fell 60 percent to close at $90.

Many investors fully understand the contradiction between GameStop’s stock price and its business fundamentals. But for those who imagine it to be the next Tesla or Amazon, the truth is: It’s likely not. The company’s quarterly report issued in September showed another steep quarterly sales decline as it struggles to adapt to the rise of mobile gaming and digital downloads that have rendered its more than 5,000 stores obsolete, even more so during the pandemic.

And the attention-grabbing media coverage didn’t bring shoppers back to the stores in recent weeks. Customer traffic declines accelerated in January, according to new research from analysis firm Placer.ai. For the week ended Jan. 18, the number dropped 20.3 percent compared to a year ago.

Analysts polled by FactSet have a “sell” rating on the stock and a price target of $13.44 per share. Some analysts believe a reasonable valuation could settle in around $20 to $30 per share at best.

While GameStop’s new board member Ryan Cohen, the founder of online pet store Chewy, has raised hopes of a turnaround, it’s still going to be an uphill battle.

“It’s fascinating to watch. But ultimately you can’t escape gravity,” said Scott Rostan, CEO of Training The Street, which teaches financial modeling and valuation to college students and MBAs. “Ultimately, the reality is going to set in, and ultimately, the fundamentals are going to have to come to play. “

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