We're adding Gamestop (GME) to our Best Ideas Long list and adding Best Buy to our Best Idea Short List.
We're hosting a call tomorrow, Wednesday December 23rd at 12:30pm, to review the thesis on each, with more time an attention on GME – which we think is the more controversial of the two by a long shot.
Call Details
Date/Time: Wednesday, December 23rd at 12:30pm EST (Add To Calendar CLICK HERE)
Toll Free:
Toll:
UK: 0
Confirmation Number: 13714268
Live Video Link: CLICK HERE
Long GME -- New Management + New Cycle + Reopening + Pure Hatred = Massive EBITDA Ramp and 2+ Bagger In the Stock
The GME bear case, of video games are going to digital download, is both stale (like, 10+years stale) and wrong over a TAIL investment duration. The new consoles have disk drive versions for a reason, it's what the consumer wants. And more specifically it's what the core gamer (often GameStop customer) wants. Now the new console cycle will drive a big ramp in sales on a company with a rationalized store base and lower operating cost structure. Short interest is as high as any stock we have seen, with Factset indicating shares short above the diluted shares outstanding. That’s complete complacency on the short side to have not covered in the low single digits before a new console launch would reaccelerate the fundamentals. You have a new management team that is simplifying the operations and focusing on the core gaming consumer while building an online business. At the same time you have Ryan Cohen (co-founder of Chewy) who has bought nearly 10% of the company with an apparent strategic plan to revitalize the business. That turns the super-tail investment case from "Blockbuster" to somewhere between turnarounds of Best Buy and Restoration Hardware. On simply the momentum from a dragged out new console launch cycle, and a moderately better run company, we see 21/22 EBITDA of $300mm-$420mm EPS of $2.70-$3.20. We think this should trade at least similarly to other "structurally pressured distribution vs content" type retailers, like FL. FL trades at .75x EV/Sales, 10x PE and 5-6x EBITDA. We'd put fair value on GME around $25 to $30 vs $14.80 at today's close. If the company can execute a turnaround strategy to make Gamestop the leading store and online destination for the gaming community, you could have a stock at $50+.
As we look at the trade today, GME also has the style factors we want to be long in this Macro Quad2 environment, that is small cap, high short interest, higher beta, with consumer discretionary exposure.
Short BBY -- Peak Margins + Demand Air Pocket Upon Recovery + Credit and Warranty Risk + People Love to Own It for the Wrong Reasons = 30%-40% Downside
Best Buy has been rising on our short bias list over the past two months as we’ve gone deeper on the research. We added it to the short side in early October ago and the stock is down about 10% since in an up market, but we think there is more downside in this short. BBY has been benefitting from the general wallet shift to the electronics category in 2020, as many services/experiences have been unavailable and out of favor in 2020 during the pandemic. Within the strongest goods categories, BBY has seen some of its core products like home computing, home theater/entertainment, appliances and fitness equipment, all getting high demand as consumers invested in the home and home schooling. The replacement cycle for appliances, laptops, TVs, monitors, tablets, and other quarantine video consumption and learn from home items will be several years. Demand has been pulled forward leaving a 2021/22 air pocket which will be at the same time consumers will shift wallet back to service/experience consumption. The bull case is around new gaming systems and 5G phone tech, but we don’t think the upside from those will be enough to offset the air pocket in other categories. There is also a high level of exposure to credit card income with little disclosure on the subject, which is a hidden risk should the unemployment trends ever lead to a real consumer credit problem. We estimate that 20-30% of EBIT is from BBY’s credit card. In addition sales of extended warranties are around 40% of EBIT. Do the math…that means that sales from retail products only represent 30-40% of earnings. With the pull forward in demand, the Street is still expecting positive comps in 2021, peak margins, and flattish EPS. While not overly bullish, that still looks overly optimistic given the growth comparison setup and incremental wage pressure YY. Short interest is at all-time lows (sub 2%) and while we’ve seen multiple contraction since we first added this short-side, its valuation is still not discounting the risk that we see to NTM earnings expectations. Retail sales, Credit and Warranties are all connected at the hip, and should all show weakness as the economy reopens. We’re getting to EPS of $6.15 in 2021 lapping the Covid demand bump, and $6.80 in the first full ‘re-opened’ year vs the Street at $8.40. BBY likely to test a trough multiple in that scenario, which suggests something closer to 9-10x EPS, or a stock of about $60 -$70 or ~30%-40% downside from current levels. People are loving this stock for all the wrong reasons at the wrong part of the wrong cycle, and we think it will have its day of reckoning.
