NYU's 'Dean of Valuation’: GameStop would have to fall to $30 to be fairly priced

Published Wed, Feb 3 20212:01 PM EST

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

(This story is for CNBC Pro subscribers only.) New York University finance professor Aswath Damodaran told CNBC on Wednesday he believes GameStop has more room to fall before it reaches what he considers a fair valuation. The video-game retailer's stock was trading at nearly $108 Wednesday , up close to 20%. That follows two sessions of steep declines earlier this week as the retail-trading frenzy in the stock unwinds. GameStop shares — which rallied 400% last week , at one point reaching an all-time high of $483 apiece — had surged in response to a short squeeze sparked by online traders rushing into the heavily bet-against name. In an interview on "Squawk Alley," Damodaran said he believes its possible for GameStop to shake off its struggles as a retailer with a significant brick-and-mortar footprint. Indeed, the addition of Chewy co-founder Ryan Cohen to GameStop's board in early January ignited optimism around the potential for a digital transformation . "There are plausible paths for GameStop to reinvent itself as an online retailer, as a gaming platform, that reaches," said Damodaran, who is known as the "Dean of Valuation" for his company analyses. "So my estimate of value, my base estimate, is about $30 [per share] but I could see why you could get to $50, maybe $60 with a plausible story." "But when I see $150, $200, $250, there's almost no way I can get to that value with any plausible story," he added. The average analyst price target for GameStop is $13.44, according to FactSet. The most bullish price target is $33 from Telsey Advisory Group's Joseph Feldman , although the analyst has a sell rating on the stock. Despite its recent pullback, GameStop shares are still up more than 2,500% in the past 12 months; in February 2020, it traded around $4 per share. The stock had been one of the most hated on Wall Street, and at one point had more than 100% of its float shares sold short . Short selling is a strategy in which an investor borrows shares of a company and then promptly sells them, expecting that the price will decline in the future. The short seller buys back the stock at its lower price and gives back the borrowed shares, profiting off the difference. Damodaran said he's watched the video published in August by Keith Patrick Gill, who is known as Roaring Kitty on YouTube and DeepF------Value on Reddit. Gill has been one of the leading GameStop bulls who helped spark the GameStop frenzy by continually hyping the stock. In the August YouTube video, Gill argues GameStop is actually undervalued and could trade around $50 per share if the company successfully innovates around e-sports and digital commerce. Gill also notes the large short position in the stock could make it particularly vulnerable to a squeeze. "It's actually a pretty plausible story," Damodaran said of Gill's contention that GameStop is undervalued. However, Damodaran issued a word of caution to people still in the stock. "I think the problem, though, is once break through the $50 and you're at $100, $150, $200, $400 as it was a couple days ago, you're no longer investing," Damodaran said. "You're trading, and you've got to be very clear about what you're trading on, which is a company with a broken business model."

People walk by a GameStop store in Brooklyn on January 28, 2021 in New York City.

Spencer Platt | Getty Images News | Getty Images

(This story is for CNBC Pro subscribers only.)

New York University finance professor Aswath Damodaran told CNBC on Wednesday he believes GameStop has more room to fall before it reaches what he considers a fair valuation.

The video-game retailer's stock was trading at nearly $108 Wednesday, up close to 20%. That follows two sessions of steep declines earlier this week as the retail-trading frenzy in the stock unwinds.

GameStop shares — which rallied 400% last week, at one point reaching an all-time high of $483 apiece — had surged in response to a short squeeze sparked by online traders rushing into the heavily bet-against name.