Jefferies analysts stand out with big GameStop target price hike

(Reuters) -Jefferies Financial Group Inc raised its price target on GameStop Corp nearly twelvefold on Wednesday, breaking ranks among the rest of Wall Steet which has insisted that a Reddit-fueled frenzy in the stock defies reason.

FILE PHOTO: A man walks in front of a GameStop store in the Jackson Heights neighborhood of New York City, New York, U.S. January 27, 2021. REUTERS/Nick Zieminski

Jefferies analysts Stephanie Wissink and Anna Glaessgen raised their price target on the video game retailer to $175 a share from $15, citing the company’s pivot to online sales.

“Our thesis is simply that rebalancing sales away from video game software/hardware will deliver superior gross margins,” the Jefferies analysts wrote in their report.

“If the company successfully sheds its retail heritage and morphs into a digital commerce,” its valuation could rival other purely online businesses, they said.

The analysts stated in the report that their firm’s investment banking arm had been hired by GameStop for a potential stock sale plan. Brokerages typically have a strict separation between equity analysts covering companies and investment bankers working for them.

The Jefferies analysts also disclosed that the firm owned through its affiliates or subsidiaries 1% or more of GameStop’s common equity.

Jefferies did not respond to requests for comment, while a GameStop spokesman declined to comment.

Jefferies’ stock price target for GameStop is far higher than the $25 median among seven analysts covering the company, according to data from Refinitiv. GameStop shares ended trading down 33.8% on Wednesday at $120.34, after the company said it was evaluating the possibility of a stock sale.

GameStop has found itself at the epicenter of an unprecedented trading frenzy since January, as amateur investors organizing on Reddit and other social media sites bet against Wall Street hedge funds that shorted the Grapevine, Texas-based company’s shares.

Jefferies was tapped by GameStop in December to handle a potential stock sale, though the retailer disclosed on Tuesday that no shares had yet been sold as a result. GameStop also said it was considering upsizing the stock sale program.

Jefferies’ “upside scenario” for GameStop sees factors such as the company successfully shifting its sales mix towards collectibles, accessories and digital, the analysts’ report stated.

The analysts came up with their new price target by valuing the company using a sales multiple, rather than earnings before interest, taxes, depreciation, and amortization. They assumed GameStop’s e-commerce business would grow sharply, with the transfer of 50% of its 2020 store sales online, according to the report.

The analysts kept a “Hold” rating on the stock.

Reporting By Sinéad Carew, Noel Randewich and Lance Tupper; Editing by Ira Iosebashvili, Paul Simao and Marguerita Choy