GameStop's Stock Is Trading At A 42% Discount, Says Morningstar

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  • According to Morningstar’s latest mid-September report, considering the share price of $28.6, GameStop’s shares would be trading at a 42% discount.
  • Morningstar rates GameStop as moderately undervalued for its fair value, with a 4-star star rating.
  • Morningstar’s fair value estimates consider retroactive share prices, however, GME has a “very high” level of uncertainty according to the report.

Figure 1: GameStop’s Stock Is Trading At A 42% Discount, Says Morningstar

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(Read more from Wall Street Memes: GameStop Stock: 71.3 Million Shares Directly Transferred To Transfer Agent)

Morningstar Latest Report On GME

According to Morningstar’s report, the fair value of GameStop  (GME) – Get GameStop Corporation Report should be $49 the investment analyst firm. This indicates a discount of about 42% from the last share price – taken into consideration for the report of $28.6 per share on September 16.

According to Morningstar’s star rating, GameStop has a 4-star rating, indicating that the stock is moderately undervalued and trading at a certain discount to its fair value estimate.

Morningstar’s estimate of fair value is calculated based on the estimated long-term intrinsic value of the stock and considers the quantitative analysis of fair value estimates based on backward-looking price movements.

The calculation of the estimates is also based on the amount of cash the company will generate in the future, taking into account the future cash flows listed as the “uncertainty rating” – which Morningstar rates as “very high” for GME.

However, with a price/fair value ratio between 0.6, this indicates that GameStop’s stock price is below fair value estimates.

Morningstar also provides an economic moat rating, which is a representation of how sustainable the company’s competitive advantages are. In GameStop’s case, the rating is “none” – indicating that Morningstar probably views the stock as undervalued based on its recent trading history and not necessarily due to business fundamentals.

Bullish, But Not As Bullish As Previous Report

While Morningstar’s fair value report is bullish for GameStop, the previous one from mid-July was even more bullish. At the time, Morningstar’s estimate was $55.39 for GameStop, amidst the bullish period the company was experiencing with the 4-for-1 stock split taking place.

However, the July star rating for GameStop stock was three stars, indicating that the price at the time of $34.05 indicated that the stock is considered fairly valued. However, the uncertainty rating for the gaming retailer was also considered high risk.

An Exception Among the So-called ‘Smart Money

Morningstar’s bullish view on GameStop’s valuation is an exception among the so-called ‘smart money’ consensus where GameStop stock is an abnormality.

Arguably, analysts and investment firms have done their jobs by analyzing GameStop from a business fundamentals perspective.

But considering GameStop’s unconventional trading activity after the meme boom of January last year, does it matter at this point to consider only fundamentals when analyzing GameStop stock?

Ideally, an opinion on GameStop stock should take into consideration and not underestimate the ability of retail investors to support very high price levels on AMC stock for such a long period. Also, the volatility of GME opens a window for traders to enter the game to profit from the speculative nature of the stock.

Thus, fundamentals without consideration of the impact of the “meme frenzy” tells an incomplete story for GameStop, in our view. Even Wall Street is still largely unaware that GameStop remains one of the most popular stocks – if not the most popular – on social media discussion boards among retail investors.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)

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