GameStop Jumps Above $100 In Volatile Trading Despite Double Downgrade To Sell

Shares of GameStop (GME) are soaring on Monday despite Telsey Advisory analyst Joseph Feldman's double downgrade to Underperform, a sell-equivalent rating. The analyst sees a "disconnect" between GameStop's fundamentals and its valuation following the recent surge in the shares, and believes the stock's rally is likely being driven by a short squeeze and speculation by retail investors on forecasts for the new gaming cycle and the involvement of activist RC Ventures.

FUNDAMENTALS, VALUATION DISCONNECT: Telsey Advisory analyst Joseph Feldman double downgraded GameStop to Underperform from Outperform with a $33 price target. The analyst sees a "disconnect" between GameStop's fundamentals and its valuation following the recent surge in the shares. Further, Feldman says the 10-fold advance in the stock since his September upgrade "far exceeds" his "high fundamental expectations." GameStop's enterprise value to EBITDA valuation multiple is now at about 33 times, significantly ahead of many leading retailers and the company's 10-year average, Feldman added.

The stock's surge is likely being driven by a short squeeze and speculation by retail investors on forecasts for the new gaming cycle, as well as the involvement of activist RC Ventures, he contended. The analyst believes the current share price and valuation levels "are not sustainable," and expects the shares to return to a more normal and fair valuation driven by the fundamentals. Nonetheless, and despite industry challenges, including the ongoing shift to digital and competition from store and online retailers, Feldman thinks GameStop should continue to benefit from the new gaming cycle, with current demand far outpacing supply for new generation Microsoft (MSFT) and Sony (SNE) consoles; its recent agreement with RC Ventures and the board refresh; and its healthy balance sheet, with a net cash position of $101M at the end of the third quarter of 2020.

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