Why Citron is right about Gamestop's 'terminal decline'

Yahoo Finance’s Brian Sozzi, Julie Hyman, and Myles Udland discuss the market action for GameStop.

Video Transcript

[MUSIC PLAYING]

JULIE HYMAN: I'm still getting used to Brian Sozzi with the laser eyes there.

MYLES UDLAND: It makes him look old. I don't know.

JULIE HYMAN: You have trained your laser-focused gaze this morning, Brian, on shares of GameStop. But you're not the only one looking at this stock lately. And it's-- it's had quite a ride.

BRIAN SOZZI: Yeah. Listen, I have-- I've tried not to-- I've watched this stock go up the past six months, GameStop, about 973%. I haven't said much. I didn't want to dust off my former analyst skills. I've let it be. I've let the stock climb, not said much, but I can't take it anymore.

Really, shares yesterday in GameStop rose 9.9% after short seller Citron Research canceled a live stream where it was going to come out with five reasons why GameStop is really a $20 stock or if not worse. They canceled that live stream, for whatever reason. So I came up with a few reasons why I would say GameStop really remains a troubled retailer.

First and foremost, they have 5,000 stores. You know, I don't know what planet GameStop is living on here, but the reality is we are in the age of e-commerce, especially during the COVID-19 pandemic. There is no reason to still be having 5,000 retail stores, mostly in absolutely terrible locations in old, dying malls, to have these stores open.

And if you go back over the past 10 years, they have really continued to have thousands of stores open throughout. Now, they will close close to 500 stores this year, but still, 5,000 stores to be operating right now with all those lease liabilities and with traffic continuing to fall is absolutely ridiculous.

And speaking of longer term performance, I went back to 2012, and I would characterize GameStop as a long-term value destroyer. Since 2012, GameStop's revenue has gone down from-- gone from $9 and 1/2 billion to about $6 and 1/2 billion estimated for 2020. Operating profits during that time have fallen close to $400 million.

Why? You've seen a seismic shift in how people buy video games. They are downloading content off the internet. And it's great when you have these new consoles come out and people go to GameStop. That's great. But people are downloading-- gamers are downloading games from online, and there's more competition in the content space like never before-- Netflix, YouTube, you name it.

And then last but not least, there have been five CEOs at GameStop since late 2017. I can't think of another company that has had that much executive turnover, which is probably one of the reasons why you've seen massive long-term value destruction at GameStop. Now, the reason why the shares are up is because you have Chewy founder Ryan Cohen has built a 13% stake in the company. He recently joined the board.

Newsflash to all these GameStop investors. GameStop is not Chewy. They do not serve products to adorable, cute puppies and cats. They are a retail-led business. Chewy had no stores. They're an online business. GameStop has 5,000 Stores. It's not Chewy. Wake up, GameStop investors. This is absurd.

MYLES UDLAND: I mean, look, Soz, I think the thing with GameStop is it's a fascinating name to look at in the context of, yeah, sure, there's an activist campaign. You've got new board members. And, you know, Michael Burry's been talking about this stock for some time. It was in the mid single digits, which we know the Robinhooders love. It's a cheap stock because the stock price is low. Obviously that is not how valuation works, but that's how it works to many people who are now participating in the market.

This is also-- like, this is a Reddit-- this is a Wall Street bets play. Like, this is a name that people on Reddit have gotten excited about. It was heavily shorted, still remains heavily shorted. The stock went from $4 to $40. I think there's a lot of fundamental things that you can maybe talk yourselves into.

Remember, Citron wasn't going to come out and say the stock should go to zero. It was going to say the stock should go to $20, which is still up 5x from where the stock was trading just a couple of months ago. And so there are so many dynamics here with this name. And I think it is quite emblematic, not to mention it's a brand that you don't have to be an expert in financial markets to be like, oh, I've heard of GameStop. They sell games, right?

And I think people can understand that enough to-- I mean, that TikTok meme that we all saw over the weekend. A guy says, oh, I go on Robinhood. I look at the stocks that go up. And when the line stops going up, I sell it. Well, look at the chart of GameStop. The line's still going up.

And I think that it's very difficult in the financial media, where we've all been kind of taught, like, fundamentals are the real thing. Don't worry about technical analysis. Don't worry about memes on the internet and what some random guy says. I mean, the latter part of that is a big part of what's moving stocks in the market. It's very difficult, I think, to make heads and tails of it.

So I agree with the fundamental view on GameStop. I just don't know that Andrew Left is going to come out and just nail where the psychological top in this thing is. And I'm not really sure that that's a hill that-- that's not really a position that I find all that attractive.

BRIAN SOZZI: Well, maybe he should come out and say the stock could eventually go to zero. And the basic premise is this. Where does GameStop fit in the future of consumption, in the future-- over the next decade? You're not going there to buy food. You cannot drive a sustainably profitable business-- and GameStop has not been profitable in 2020. They are not expect to be profitable next year.

You cannot drive a sustainable business relying on Sony and Microsoft to come out with new consoles every four to five years. It's just not realistic.

JULIE HYMAN: All right, we'll see who's right about all of this eventually.

BRIAN SOZZI: Lasers!

JULIE HYMAN: Yes, definitely not sparing any-- any lasers this morning.