One-time GameStop bull Telsey downgrades to sell, says price surge is unsustainable

Published Mon, Jan 25 20219:23 AM ESTUpdated Mon, Jan 25 20214:13 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

Analysts at Telsey Advisory Group are bullish on the turnaround story at GameStop , but the recent surge in the stock has forced the firm to the sidelines. Shares of the brick-and-mortar video-game retailer jumped again Monday , putting the stock up more than 300% in January amid a short squeeze and flurry of retail trader interest. The moves have been too much to stomach for Telsey's Joseph Feldman, who downgraded the stock to underperform (equivalent of sell) from outperform. The firm did hike its price target to $33 per share from $22, but even the new target is 70% below where the stock was trading Monday morning. The firm said it still likes GameStop's plan for a turnaround, including improving its digital offerings and expanding into PC gaming and adding Chewy co-founder CEO Ryan Cohen to its board. However, even that optimism can't justify the current share price, Telsey said in a note to clients. "In our view, these are the right steps to move forward, but could take longer to generate results. The early success of these strategies is already reflected in our model and valuation," the note said. In fact, the note said, even if Tesley's estimates become more optimistic, the stock price still doesn't make sense. "For 2022, if the company achieves an operating margin of 4.0% or 5.0%, instead of our arguably optimistic current estimate of 3.0%, it would result in EBITDA of ~$312MM or ~$370MM, respectively, and would imply a stock price of $40 or $47, respectively, based on our 8x EV/EBITDA multiple," the note said. GameStop was trading at $110 a share Monday morning. When Tesley upgraded the stock to outperform in September, the stock was trading at $6.09 per share. GameStop is one of the most shorted stocks in the market, with more than 100% of its floated being sold short as of last week . High levels of of short interest can make a stock susceptible to a short squeeze, where short sellers buy shares of stock to cover their positions when a stock starts to rise, creating even more demand. Short seller Citron Research said last week it would not be commenting on the stock any more, citing the "angry mob" of retail traders that own the stock. The average price target on the stock is $12.39, according to FactSet, and no major analyst has a buy rating on the stock.

Pedestrians walk past a GameStop Corp. store in New York, U.S.

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Analysts at Telsey Advisory Group are bullish on the turnaround story at GameStop, but the recent surge in the stock has forced the firm to the sidelines.

Shares of the brick-and-mortar video-game retailer jumped again Monday, putting the stock up more than 300% in January amid a short squeeze and flurry of retail trader interest.