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Retail investors, hedge funds go to war over Gamestop

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Wedbush's Michael Pachter on the monumental run-up in Gamestop shares that's pitting the Robin Hood crowd, versus hedge funds shorting the stock.

Video Transcript

SEANA SMITH: Let's talk about GameStop. It is-- shares have really been on a wild ride over the last several days. Today alone the stock closing up 92%, up another 27% here in after hours. We wanna bring in Michael Pachter. He's at Wedbush. He covers the stock. We also want to bring in our tech editor Dan Howley joining the conversation.

Michael, your last note, I was reading through it. On January 11th, you had a neutral rating, a $16 price target. I'm curious just how you're looking at the action that we've seen the last couple of days in GameStop and what that means for the company at this point.

MICHAEL PACHTER: Uh, I'm as mystified as everybody else. So, uh, it means nothing for the company. I mean, I guess it's fun to be a cult stock, and it's fun to have a-- a lot of people talking about you. Um, they're not gonna do anything differently because their share price went way up other than perhaps issue a little bit of equity and pay down some debt. And they had already filed back when the stock was in the teens that they would do a $100 million capital raise at the market. As far as I know, they haven't exercised that. So easier to sell half a million shares than to sell, you know, 5 or 6 million shares.

And I would advise them to sell, you know, 400 million worth of stock at these prices and pay their debt down to zero because no bankruptcy risk if they're profitable and they have no debt. So that's the only difference. But this-- you know, the-- the euphoria of Wall Street bets on Reddit doesn't impact earnings unless all those people go in and buy games at GameStop, so I don't think it makes much difference at all.

ADAM SHAPIRO: And that's a great question. I'm gonna go first to Dan Howley on this. Why is there even a GameStop in this world? Dan.

DANIEL HOWLEY: Uh, that's a good question. That's kind of, uh, the point that I kind of make in my column that I'm writing on this. Basically, you know, there is this kind of euphoria around the stock, whether it's just people doing it to fight against what they, uh, think are Wall Street elites, or they have a genuine sense that this company is going to continue to do well.

But, look, I got to say in the next couple of years I don't think GameStop exists. Uh, the switch to digital games downloads now is more-- people are buying more digital games than physical games. All of the consoles have their own stores. People don't need to go to a GameStop.com to buy games. The same thing goes on PC. Uh, Valve's Steam is its own store.

You don't need to go to GameStop.com to get those games, so there's no sense of really needing that. And, you know, they can do as many, uh, TV sales or PC game, uh-- gaming rigs as they want for sale on their, uh-- their website. Amazon still exists. So I just don't know where GameStop fits in in this universe now.

SEANA SMITH: Michael, what about you? I mean, when you're looking at where GameStop fits in going forward, how do you see it?

MICHAEL PACHTER: Um, I don't know Dan, and he looks like the kinda guy that I wanna have a beer with. So, Dan, I mean this with all respect. Um, there's a huge reason for GameStop to exist, and that is that they are the market maker for used games. And so, you know, if you value the trade-in of a game, then you're gonna buy a physical copy, and you're gonna trade it in at GameStop. And they don't give this-- this, uh, metric anymore, but they used to tell us that about 65% of all transactions at GameStop involved trading credits. So that would tell you about 2/3 of their activity involve some form of game traded in.

The people who buy a $60 game physically look at it as a $20 bill. And people who buy a game digitally don't ever have any intention of trading it, and they can't. They're-- they're precluded by end-user license. So physical goods can be resold. 2/3 of the people who shop at GameStop understand that and value that, so they're not going away until the console manufacturers say that they're going away.

And I think the open question was in mid-2019 we got the specs on the Xbox Series X and the Playstation 5, and they both had optical disk drives. So the console manufacturers made the decision that they were gonna let GameStop live and they were gonna keep selling physical media. Once they made that decision, GameStop's in business for seven or eight more years. So, Dan, I think you're right. Eventually, digital will-- will dominate, but not the next couple of years. It's gonna take seven or eight years.

DANIEL HOWLEY: And I-- I do agree that, you know, the-- the value there is the physical games, right? You-- you go and you trade those in. Uh, I think eventually it may be more of a boutique experience. Uh, I go to game shops with my wife, and we buy vintage games. Um, but I don't, you know, see-- Sony released the Playstation 5 for 499-- I believe it's 499-- as a digital-only version. So it almost pushes people towards the digital-only experience.

MICHAEL PACHTER: 399. Yeah, yeah.

DANIEL HOWLEY: 399. So 499--

MICHAEL PACHTER: Yeah.

DANIEL HOWLEY: --for the-- the physical version, so it's almost pushing people in that direction. Um, you know, you got the same thing with, uh, the Xbox. Um, I do think that eventually it's-- it's going to go the way of-- of a Blockbuster, though. Yeah.

MICHAEL PACHTER: Pregnant pause for that.

SEANA SMITH: All right. Michael Pachter, great to have you back on Yahoo Finance-- of Wedbush. We really appreciate. We hope to have you back again soon. And, of course, our thanks to Dan Howley as well.