Disheartening GameStop (GME) Earnings, r/WallStreetBets Traders Buy The Dip
The biggest disappointment was its lack of guidance regarding its ambiguous "transformation" plan. Best Buy (BBY) may be worth a glance if you're look...
GameStop's GME, the prodigal son of retail equities amid the retail apocalypse, saw its shares dropped off a 10% cliff out of the gates Thursday morning following a rather disappointing earnings call the prior evening. GameStop missed EPS estimates by a mile, but the biggest disappointment was its lack of guidance regarding its ostensibly ambiguous "transformation" plan.
However, this rational morning dip was quickly bought up by the seemingly irrational cohort of r/wallstreetbets (WSB) traders (though they did utilized its 50-day moving average, which became a technical support level). This group of nostalgic market-moving traders drove GameStop up thousands of percentage points this year, allowing the firm to raise over a billion in cash through seasoned equity offerings. However, as of now, it looks to be burning a hole in the company's pocket, with an inability to turn a profit with its current business model and no guidance on a new approach.
Ryan Cohen, the 'visionary' activist investor with aspirations to drive growth back into this antiquated retailer, is yet to show investors how he plans to do so. With no plan in place, GameStop may run out of money before any operational shift can even be made. I would steer clear of this gambling apparatus.
On the other hand, Best Buy BBY had an excellent July quarter, blowing analysts' estimates out of the water and demonstrating another record set of Q2 results. Best Buy solidified its market control of consumer electronics in the retail space amid the pandemic, as its smaller (less liquid) competitors dropped out of the market.
Best Buy has shown excellent operational efficiency in the past 12 months with double-digit sales growth that flowed down in a margin-expanding fashion to even more significant earnings growth. BBY just exhibited its largest operational margins in the stock’s over 2-decade history, with digital omnichannel options shaping up to be a strong profit driver. As the world went remote, there was a significant amount of pulled forward demand. Still, consumers' progressing penchant for the latest tech will continue to power this leading consumer electronics retailer through the Roaring 20s.
BBY represents an excellent value buy after more than a year of sideways trade, which has compressed its valuation multiples (earnings appreciating as share price remains the same). Its current forward P/E sits at 11.5x, which is sizably below both its industry and 5-year averages of 19.9x & 13.5x, respectively. BBY's recent trading slump sets it up for attractive upside potential.
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