A summary of the Gamestop (GME) "pump and dump" speculation

Source:

https://www.zerohedge.com/markets/goldman-does-valuation-still-matter

 

"For more than a year the short interest in GME exceeded 100% of the float of the company, and it reached 140% in January ..

... a "situation which is highly unusual" because during the last 10 years, Goldman has found only 15 instances when the short interest outstanding exceeded 100% of a company’s float, and as the bank explains, perhaps for the cheap seats, "extremely elevated short interest is a pre-condition if a major short squeeze is going to occur" ...


... The entire episode was all about price, and nothing about valuation" as "social media commentary typically referenced price action with lofty targets sometimes illustrated with rocket ship emojis. 

We almost never read a comment about valuation because the rally implied an astronomical P/E multiple." 

... GME shares traded at an average price of $13.50 during 2018. 

The stock then fell sharply and between mid-2019 and mid-2020 (a period stretching from well before through the bottom of the Covidcrisis) the stock traded sideways at $5 per share. 

A 4Q rally pushed the shares to $19 at year-end. 

... On Jan 13th the stock hit $30, rose to $40 the next day, and had jumped to $65 by Jan 22. 

The progression during the five days from Jan 25 to Jan 29 was epic: $77, $148, $348, $193, and the stock ended the month at $325, up 1,600% since the start of the year.

 
(last) week the shares have plunged by 80% to $64.


... Long before the pandemic, revenues for GME fell by 22% from 2018 to 2019 followed by an additional 20% drop last year. 

The plunge in earnings has been even more dramatic. 

In 2019 –pre-pandemic –EPS fell by 92%. 

In 2020, GME posted a loss (-$2.18) and analysts expect a loss in 2021 (-$0.17). 

Consensus projects GME will return to profitability in 2022. 

However, the forecast EPS in 2022 (+$1.35) is only half the realized EPS in 2018 (+$2.70) back when the shares traded at an average price of $13.50 (low of $11; high of $17)


The absurdity of the January spike in GME share price becomes readily apparent when viewed through the lens of implied valuation. 

The implied P/E on projected 2022 EPS two years into the future soared from 14x at year-end 2020 to more than 250x at the peak on Jan 27, before retreating to the current P/E of 42x." 

For context ... The more mundane S&P 500 index trades at 20x our 2022E EPS of $196."