GameStop Corp. was downgraded Wednesday to the equivalent of a sell rating by Wedbush analyst Michael Pachter, who praised management and the business outlook but expressed concern over excessive valuation.
The downgrade comes after the videogame and consumer electronics retailer reported late Tuesday fiscal fourth-quarter profit and sales that missed Wall Street expectations.
tumbled 14.4% in premarket trading following the results. It had shed 13.4% amid a four-day losing streak through Tuesday, but was still up 78.6% month to date.
Pachter cut his rating to underperform, after being at neutral since March 2020. He raised his stock price target to $29 from $16, but his new target is 84% below Tuesday’s closing price of $181.75.
Pachter said he believes GameStop is set up to be a “primary beneficiary” of the new gaming console launches, putting the company on track to return to full-year profitability in fiscal 2021. He said the raised price target reflects “excellent execution” by management amid an “exceedingly difficult” competitive environment. But the share price is just too high.
“The high-profile sustained short squeeze seen in recent months, however, has spiked the share price to levels that are completely disconnected from the fundamentals of the business,” Pachter wrote in a note to clients.
The stock had soared 1,625.1% in January, and has rocketed 4,269% over the past 12 months, as the so-called meme stock was the poster child of the trading frenzy stoked by social media surrounding heavily shorted stocks. In comparison, the S&P 500 index
has gained 59.8% over the past year.
Of the seven analysts surveyed by FactSet who cover GameStop, four have the equivalent of sell ratings while the others are at the equivalent of hold. The average price target is $40.64, or about 78% below Tuesday’s closing price.
“Despite the company’s ongoing short-squeeze dynamics and recently announced departures of key executives, we believe GameStop can grow earnings at an above-market rate in coming years,” Pachter wrote. “We believe GameStop can retain its market share within the used games business, scale its ecommerce platform and benefit meaningfully from the growing presence of Ryan Cohen, a co-founder of Chewy and GameStop board member.”