On the other hand, SDC stock seems like a more obvious short target. The company remains unprofitable, sits behind industry leader
Align Technology (NASDAQ:
>ALGN), and still has a market capitalization over $4 billion. That profile highlights the risks. But the potential rewards are big as well. Teledentistry would seem a market large enough for multiple winners. It's also a market that got a boost from the pandemic. Meanwhile, SmileDirectClub has managed to grow nicely of late. Profitability metrics are improving. The company seems to be on the right track — in a market that's been patient with growth stocks. It's still possible that shorts are proven right over the long term. But it's just as possible that they're wrong, and in a big way. On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
More From InvestorPlace 5/5 SLIDES
GameStop is also smartly taking advantage of its inflated stock price, with its recent $551 million secondary equity offering. Yes, it’s dilutive for current shareholders. But, considering the company today sports a $12.3 billion market capitalization, dilution is minimal. It’s a low-cost way to bulk up its war chest.
With a change in vision, and plenty of cash to possibly turn this vision into a reality, the company may morph into a major e-commerce company. The issue, though, is that GME stock continues to trade as if it’s already a large online retailer.
Sure, “it could grow into its valuation.” But, with the pivot still in its early stages, it’s premature to say that it’s certain. Building itself into a leading e-commerce company will take time. And, with so many established names already dominating the space, GameStop has its work cut out for it. At best, this evolution will help keep the stock steady. However, it will do little to move the needle further for shares.
In fact, with disappointment in this transition the more likely outcome, a massive selloff may be just around the corner.
The Bottom Will Inevitably Fall Out
For now, the idea of an e-commerce shift is enough to keep the stock’s devoted fans happy. But, at some point, it’s going to have to deliver. And, with this strategy change likely a multi-year endeavor, it’s going to take more than a few quarters for it to make progress.
What does this signal? It may be tough to determine when exactly the bottom will fall out. Yet it’s definitely on the horizon. As mentioned earlier, as the months progress, diamond hands will increasingly become paper hands. But, with the “meme stocks” trend largely over, there are few new buyers willing to dive into this.
As possible sellers outnumber possible buyers, we’re going to see substantial downward pressure on GME stock. To what extent? The e-commerce catalyst, along with the war chest of cash, may mean shares have little chance of fully falling back below $20 per share (what they traded for back in early January).
A selloff may find a floor at much higher prices — say $50-$100 per share. A $3.5 billion to $7 billion valuation seems fair for a company that is looking to build on its approximately $1.5 billion in online sales last fiscal year. In other words, you might expect a possible decline as little as 42.9%, but as high as 71.4%.
Bottom Line: Continue to Steer Clear of GameStop
Its turnaround may pay off, and the company could thrive in the coming years. But, with its stock completely divorced from its fundamentals, this success will likely do little to boost the price of GameStop shares.
Worse yet, with little to support for today’s share price, a wipeout may be just around the corner. My view on GME stock remains the same: continue to avoid it.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.