Today I'll be discussing my thoughts on valuation for the hottest e-commerce
company in the world and I'm not talking about Amazon. I'm talking about Gamestop
what's up everyone, my name is Ben. I'm a former JP Morgan investment banking
analyst and welcome to rareliquid, the best channel for tech investing
In my previous video, I walked you guys through the discounted cash flow model I
built for the company and in this video I'll be focusing on my
personal thoughts and the assumptions that I would use to value the company
Also, I do plan to make a deep dive analysis video on the company for my
next one so be sure to be on the lookout for that
as well. And as a reminder, please remember that I am not a financial
advisor so please treat all content in this video as for education and
entertainment purposes only Jumping straight to it, let me start by
telling you my thoughts about Gamestop's valuation
I'll be going through my financial model that I built and if all of this is new
to you please do check out my previous Gamestop video otherwise this video may
not make a lot of sense As a reminder, in my switches here, a 1
represents base case, 2 represents optimistic case, and 3
represents a very optimistic case In my assumptions I assume an optimistic
case for revenue, a base case for EBIT margin, and
optimistic case for taxes, WACC, and terminal growth rate, and let
me walk you through each of these Starting with revenue, as I discussed in
my last video these growth rates are taken from GMEdd.com's most bullish case,
and their model assumes that Gamestop will be closing down 3,000 of its 5,000
stores from 2021 onwards, which will cause revenue to take a big
hit, but this is made up by the company's shift to e-commerce
If you look at the revenue jump here from 2020 to 2021,
I'm assuming that Gamestop will be going from negative 21%
to positive 7% then to 15%, which is pretty aggressive
The way I'm justifying the 7% and 15% is through the sharp shift to
e-commerce that the company will be making,
and the additional brand equity the company has formed over the past few
months This is a purely speculative and
qualitative take, but I believe that over the next few years, more people will want
to buy at Gamestop just because the company has got so much free marketing
from the recent movements in its stock price
If you're really really bullish on Gamestop, you'll probably also point to
the company's recent 175 percent quarter over quarter growth in e-commerce,
but you also have to remember a few things. First, new consoles for the Xbox
and Sony Playstation just came out so that is a one-time boost to sales
Second, 2020 saw a huge boost to e-commerce in general due to Covid 19.
Third, because of this large jump in e-commerce revenue this year, it's hard
to see next year's e-commerce growth rate being anywhere near the triple
digits because now the company will be comparing to a larger base
After that the revenue starts to decline and goes negative because the latest
Xbox and Playstation were introduced in November 2020 and by these last two
years, less people will be buying them as they wait for new console releases
In addition to this, I justified the negative growth rate in the last few
years because e-commerce is a pretty competitive space where there's a race
to the bottom Most customers when they buy online are
really just looking for the cheapest possible option and so ecommerce becomes
a game of scale, and in the long run I don't really see
Gamestop being able to compete effectively with companies like Amazon
In fact, if you look at this chart here, Gamestop currently is a market leader
but that share has been decreasing over time and in addition to this there is an
undeniable shift towards digital games But to be honest, I'm not really an
expert in the gaming industry and so if you have some knowledge that you want to
share in the comments below, I still respond to every single comment
since my channel is still small so please share that kind of information
because it also helped me become a better investor and maybe
will kind of persuade me to change my own assumptions. Next up let me go over
my EBIT projections which I'm more conservative on than the GMEdd.com model
I assume Gamestop will hit 25% of GMEdd.com's projected margin in 2021,
which gets us to three percent and then that ramps up to 75 percent of
GMEdd.com's model in year five, which gives us 12%. Again, I
need to stress that e-commerce is a low-margin business. Even companies like
Amazon, most investors know that the company
generates most of its profits from AWS, its cloud services, not really from
e-commerce. In addition, I know there's a lot of comparison between Gamestop and
Chewy, and even though Chewy generates more
revenue than Gamestop, the company is still
operating at a loss. This is why I think it makes sense to slowly ramp up
Gamestop's EBIT margin, which I think the company can achieve with better
management Next up for taxes, I assume an optimistic
case of a slow ramp up to 28%, which isn't likely but since there's not
yet any clarity on what Biden is going to do about corporate tax rates, I
thought this was the most fair scenario From there, I assume networking capital
of zero since the historical numbers aren't reliable,
and for depreciation and CapEx, I assume the average of the past three years as a
percentage of sales, pretty standard stuff. I then use
optimistic cases for a discount rate assuming 14%
and for terminal growth rate which gives us 2.5 percent
I go over the DCF a bit in my previous video, but I'll be going deeper into the
technical parts of the DCF in a future video, so be on the lookout for that if
you're interested This leads us to an enterprise value of
3.7 billion and when you adjust for cash and debt
the equity value comes out to 3.9 billion
which gives us an implied share price of $56.54
Now honestly, I know I might get some down votes in this video because my
implied share price is not beyond what Gamestop is
currently trading at, but I did try to be a bit optimistic with my assumptions and
I don't really see Gamestop going beyond the assumptions I laid out in this video
I'm really not trying to hate on the company and if you think there's
something wrong with my thought process or any of my assumptions, as I
mentioned, please add them to the comments down below because
I'd love to know what kind of research you guys have been doing and what
conclusions you guys have gone to. This all leads me to my
personal view on Gamestop honestly I've kind of been ignoring
Gamestop over the past few weeks until someone brought it up to me and I
started doing more research about the company and
I do think there's a lot of reasons to be bullish about the company and
I don't think that it's just a meme stock - I think there's a lot going on
behind the scenes that's important to pay attention to
Personally for me though I don't think I can justify Gamestop share price
anywhere near the triple digits and I view investing really as
opportunity cost meaning where can I be investing my money into
if not for this stock and what opportunities am I losing out
on if I do invest in xyz company. And for that reason I think
there are less risky companies out there with more upside
and so I personally don't see myself investing in Gamestop
unless it reaches somewhere in the $20 $30 $40 price range
then I think it could be a potentially good investment but it also depends
on how the management team executes and what kind of developments
the company has over these next few quarters. Also if you would like to
download this model, feel free to check out my Patreon in the
description below and you can download it and play around with the assumptions
to get to your own implied share price Lastly, I'll be doing a deep dive video
on Gamestop in the coming next few days so be sure to be on the lookout for that
if you're interested and as always thank you so much for
watching. Hopefully catch you in the next video
thanks and peace out
foreign