Is GameStop’s Stock Overvalued or Undervalued?

By Benzinga
Benzinga
Benzinga
November 6, 2021 Updated: November 6, 2021

GameStop Corp. shares have left the S&P 500 in the dust in 2021, generating a year-to-date total return of 1,060 percent.

GameStop’s stock has had a wild ride in 2021, but investors may be wondering whether there’s any value left in GameStop shares.

Earnings

A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value.

For comparison, the S&P 500’s PE is currently at about 29, nearly double its long-term average of 15.9. GameStop doesn’t currently have a PE ratio because the company is not profitable. In the most recent quarter, GameStop reported a $61.6 million net loss.

Growth

Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.6. GameStop’s forward earnings multiple of 1,481.9 is more than 70 times higher than the S&P 500’s, making GameStop’s stock look overvalued.

GameStop’s forward PE ratio is also nearly 50 times higher than its consumer discretionary sector peers, which are averaging a 30.2 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren’t everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is about 0.9. Once again, without positive earnings, GameStop doesn’t have a positive PEG ratio to use as a valuation gauge.

Price-to-sales ratio (PS) is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is 3.15, well above its long-term average of 1.62. GameStop’s PS ratio is 2.97, slightly below the S&P 500 average. GameStop’s PS ratio is also up 986.7 percent over the past five years, suggesting the stock is priced at the high end of its historical valuation range.

Finally, Wall Street analysts see no value in GameStop stock over the next 12 months. The average analyst price target among the four analysts covering GameStop is $37, suggesting about 82.8 percent downside from current levels.

Verdict

At today’s price, GameStop stockappears to be extremely overvalued based on a sampling of common fundamental valuation metrics.

By Wayne Duggan

© 2021 The Epoch Times. The Epoch Times does not provide investment advice. All rights reserved.

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