Hedge funds worried about intense scrutiny following GameStop trading frenzy: Gasparino
Sources tell FOX Business’ Charlie Gasparino that hedge funds are worried that Congress may force laws restricting trading practices, including short selling.
Behind GameStop's stock surge is the grim reality of its prospects: The video game retailer is floundering even as the industry around it is booming.
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GameStop has been swept up in a battle between big-moneyed hedge funds betting against it and small investors trying to prop it up. That has caused GameStop's share price to soar despite the shaky financials underneath.
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Flailing companies like AMC Entertainment and American Airlines have likewise enjoyed a stock surge, but GameStop has been the primary battleground between the Davids and the Goliaths. Shares rocketed 1,600% in the last three weeks, closing at $325 per share on Friday and giving GameStop a market cap of nearly $17 billion. Shares have since cratered. On Tuesday, they fell 60% to close at $90.
Many investors fully understand the contradiction between GameStop's stock price and its business fundamentals. But for those who imagine it to be the next Tesla or Amazon, the truth is: It's likely not. The company's quarterly report issued in September showed another steep quarterly sales decline as it struggles to adapt to the rise of mobile gaming and digital downloads that have rendered its more than 5,000 stores obsolete, even more so during the pandemic.
And the attention-grabbing media coverage didn't bring shoppers back to the stores in recent weeks. Customer traffic declines accelerated in January, according to new research from analysis firm Placer.ai. For the week ended Jan. 18, the number dropped 20.3% compared with a year ago.
Analysts polled by FactSet have a “sell” rating on the stock and a price target of $13.44 per share. Some analysts believe a reasonable valuation could settle in around $20 to $30 per share at best.
While GameStop's new board member Ryan Cohen, the founder of online pet store Chewy, has raised hopes of a turnaround, it's still going to be an uphill battle.
“It's fascinating to watch. But ultimately you can't escape gravity," said Scott Rostan, CEO of Training The Street, which teaches financial modeling and valuation to college students and MBAs. "Ultimately, the reality is going to set in, and ultimately, the fundamentals are going to have to come to play. “
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The Grapevine, Texas-based company was founded in 1984 as Babbage's and took over the GameStop name in 2000. It was the destination to grab the latest video games just as they were released. But it also became the place to trade in old games and consoles to get cash or credit to buy new ones.
Sales declined over the past decade with the rapid shift toward downloading games. Annual sales have gone from their peak of $9.5 billion in fiscal 2012 to an expected $5.15 billion for the year ended Jan. 30, according to FactSet.
At one GameStop location in Brooklyn, there were bright liquidation notices papered across the front windows. Inside, the shelves were for sale along with a scant mishmash of power cords, anime key chains and picked-over T-shirts.