July 12, 2021 BARRON’S 23
M
ichael Pachter can hardly
leave the house without being
asked about GameStop .The
Wedbush Securities analyst
has covered the videogame retailer
for nearly two decades. Now, he
says, everyone from waiters to the
woman giving him a Covid-19 shot
wants to talk about GameStop. “It’s
the only stock any of them has ever
heard of,” he says.
Pachter, 65, who started at Wed-
bush in 1997, figured the craziness
around GameStop (ticker: GME)
was winding down in February.
With shares tumbling from January
highs above $400, the analyst didn’t
see the need to tinker with his Hold
rating and $16 price target. The
stock retreated toward the mid-
$40s but then surged again.
GameStop shares have been solidly
above the $100 mark since Feb. 25.
The stock on July 7 was at $190.66,
and shares are up more than 900%
this year.
The viral squeeze that sent
GameStop shares to triple-digit terri-
tory befuddled analysts whose price
targets averaged out at about $13 at
the start of February. Pachter says
that short sellers, who sell borrowed
shares with the hopes of profiting by
buying them back at a lower price,
are keeping GameStop stock inflated
as they tango with a passionate base
of retail investors who gather on
social-media sites like Reddit. He
thought the short sellers would have
given up by now, after watching their
losses on paper pile up.
He was wrong, as were analysts
covering stocks such as AMC En-
tertainment Holdings (AMC),
BlackBerry (BB), and BedBath&
Beyond (BBBY). With these so-
called meme stocks on a roller
coaster powered by Reddit com-
ments, short-seller interest, and
options trading, research analysts
are scratching their heads over how
to do their job. What’s the point of a
Hold rating when your target price
for the stock is multiples lower than
where a stock is trading?
Analysts turned out research
notes for clients that, no matter how
well-reasoned, were all but useless
argued GameStop was already do-
ing. Feldman, one of the few re-
maining analysts with a Buy rating
before the surge in late January,
thought the market was underesti-
mating the impact of new video-
game consoles from Sony Group
(SONY) and Microsoft (MSFT).
“There was a fundamental reason
why we felt better about GameStop,”
he says. “And we liked that the man-
agement team was making changes
that focused on efficiency and profit-
ability and shifting toward digital—
all those good things. And then the
stockwentnuts.”
Feldman downgraded GameStop
to Underperform when it rose to $65.
Even with his optimistic view of the
company’s digital turnaround, he
couldn’t justify a target above the low
$30s. And while GameStop stock
drew plenty of interest from media
outlets, Feldman says the opposite
was true for institutional investors.
He dropped coverage on June 7. “In-
stitutions, who are our main clients,
had no interest in it,” he says.
Out-of-whack prices aren’t the
only problem. Andrew Left, an ac-
tivist short seller, stopped publish-
ing short reports in January after he
said GameStop fans harassed him
and his family for suggesting the
stock was about to fall.
For his part, Pachter says he
doesn’t pay much attention to the
chatter, though he once spotted an
online poster who said he should be
executed for having a Sell rating on
GameStop.
“Nobody is shorting GameStop
because I said so,” Pachter says.
“They’re shorting GameStop be-
cause they believe it’s fundamentally
worth $40 or $50, not $200. They
don’t need me to tell them that.”
Although GameStop has made
major changes to its board of direc-
tors and leadership team, and re-
cently raised $1.1 billion with a
stock sale, Pachter says that Cohen
has yet to share a road map for truly
transforming GameStop.
GameStop said in a proxy state-
ment that it plans to become the
go-to e-commerce platform for gam-
ers by investing in technology and
expanding its product line, but ana-
lysts like Pachter want specifics such
as financial targets.
He has downgraded the stock to
Underperform but brought his tar-
get up to $50—nearly $150 away
from its recent price.B
MEME STOCK
ANALYSTS
THROW IN THE
TOWEL
By CONNOR SMITH
Illustration by Matt Kenyon
as the market prices of meme stocks
soared to unheard-of levels. “You
can’t be upgrading and downgrad-
ing your target every day,” Pachter
says of GameStop’s volatility. “You
can’t move your target that fast.”
The disconnect between the stock
price and the company’s fundamen-
tals led BofA Securities analyst Cur-
tis Nagle to collaborate with a data
team at BofA to analyze what online
chatter could mean for GameStop
stock. They found GameStop stock
was trading in line with spikes in
chatter on Reddit forums. Many,
including Nagle, have since dropped
coverage. Only three analysts, in-
cluding Pachter, have a rating on the
stock.
“Momentum, social media are
now part of the strategy for Wall
Street, and they are in a better posi-
tion than retail to participate, sniff
out, and start gamma squeezes in
the options market,” investor Mi-
chael Burry told Barron’s in an email.
Burry—whose bearish bet against
the housing market ahead of the
subprime-mortgage collapse was
featured in the book and movie The
Big Short —exited his GameStop posi-
tion in the fourth quarter of 2020 at
a profit. Now, he sees parallels to the
dot-com bubble and the 2007 crash.
“I don’t know when meme stocks
such as this will crash, but we prob-
ably don’t have to wait too long, as I
believe the retail crowd is fully in-
vested in this theme, and Wall
Street has jumped on the coattails.”
GameStop shares had rallied after
Chewy co-founder Ryan Cohen an-
nounced he bought a stake and
called for the company to cut stores
and invest in digital operations. Co-
hen is now board chairman.
That’s something Telsey Advi-
sory Group analyst Joseph Feldman
“YOU CAN’T BE UPGRADING
AND DOWNGRADING YOUR
TARGET EVERY DAY”
Wedbush Securities analyst Michael Pachter
says of GameStop’s volatility.