GameStop surge ignores basic rule of value

NEW YORK, March 22 (Reuters Breakingviews) - GameStop (GME.N) investors sent the company’s shares up 40% on Wednesday morning after fourth-quarter results showed it had swung to a net profit. That suggests the company that counts Chewy Founder Ryan Cohen as its chair has put some of its meme-fueled fundraising to use. Unfortunately, investors have forgotten that with such a surge, GameStop will have to grow into a new valuation.

The chain reported net profit of $48 million compared with a loss of $148 million in the same quarter a year ago. Cost cuts were the main driver of those results. Despite the fact that the quarter included the important holiday season, sales fell 1% year-over-year.

To justify GameStop’s enterprise value of more than $6 billion, factoring in Wednesday’s price jump, the retailer would have to generate nearly $18 billion in revenue this year to match fellow chain Best Buy’s (BBY.N) enterprise value-to-sales ratio of at 0.4 times. That’s triple the revenue that analysts are penciling in, according to Refinitiv. Bridging the gap requires more than just hype. It means Cohen and his crew will have to get more customers in the door. (By Jennifer Saba)

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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