Ryan Cohen, Elon Musk are goofballs: GME Analyst

Gamestop has tapped two former Amazon executives as CEO and CFO. Wedbush Senior Analyst Michael Pachter joins Yahoo Finance Live to discuss.

Video Transcript

- Let's turn our attention now to shares of GameStop. It is sliding fast in this session, down nearly 13% right now after the company announced an overhaul at the top. Chewy co-founder Ryan Cohen voted in as the company's new chairman as expected yesterday. Also, two former Amazon executives named to key positions-- former Amazon Australia Chief Matt Furlong was appointed as the CEO while 17-year Amazon veteran Mike Recupero named chief financial officer.

This coming on a day when they, of course, reported their quarterly earnings. The company did post a loss per share of $.45. But sales did rise about 25% in the first quarter. Certainly, the stock is sliding on the company failing to provide an outlook for the year, saying they may sell as many as 5 million shares as well.

Let's bring in Michael Pachter, Wedbush Senior Analyst. And, Michael, you've got a 12-month price target of $50 a share. So we're looking at $262 right now where it's trading. What do you make of the shake-up at the top when-- when you think about the fundamentals here and where GameStop is headed? You've got a lot of Amazon veterans in there now.

MICHAEL PACHTER: Yeah, we don't know where GameStop is headed. But it's clear that they intend to remake themselves as an [? Amazon-lite. ?] And, you know, Ryan Cohen promised investors a strategy back in mid-January. It's been nearly five months, and we haven't seen that yet.

So I actually think the stock is probably down more on lack of, you know, an unveil of their new strategy than anything else. Possibly the Reddit Raiders-- you know, the retail investors-- wanted to see somebody from Coinbase or somebody from some cannabis supplier-- something transformational-- take over as CEO. And we got more of the same.

And as a fundamental research analyst, I am A-OK with hiring people from Amazon, especially from the e-commerce division. So these are good people. They're going to be competent executives. I'm not so sure that the departing executives were incompetent. You know, they managed to turn the company around, get it back to revenue growth. And they cleaned up the balance sheet.

But Ryan Cohen's got different ideas. And if he shared those with us, he'd have to kill us. So, you know, I think that the pullback in the stock is investors are getting tired of waiting for him to tell us what the strategy is. I'm getting tired of waiting.

And there's no chance I'm taking my target up until he shows me the path to massive profit growth. I just don't see it. So I've got them making something like $1.35 in two years. I'm slapping a 20 multiple on that, giving him some credit for growth from there. And I'm adding cash.

And the good thing they've done is they've raised cash at these elevated share prices. So that's a good thing. They're gonna have a war chest. They're gonna be able to make acquisitions. I'm pretty skeptical that they're going to pull off a trading platform for NFTs, but we'll see. You know, they talk about stuff like that as part of the [? meme. ?]

- Well, and I'm going to join you there. I'm on pins and needles, too, for that black box strategy to be revealed. But I want to go to a separate item that kind of raised a few eyebrows. That's the disclosure of an SEC probe and just that they're looking into things.

It didn't really catch my attention that much. I don't think it's that big of an alarm bell, personally, because I think they're probably going after traders unless there's some huge internal scandal that I'm missing. How do you view this?

MICHAEL PACHTER: Yeah, lawyer-- so, you know, I think you-- you hit the nail on the head. It-- it would have to be a huge internal scandal to be a problem for the stock. My guess is that there was suspicious trading activity by somebody that may or may not be related to GameStop at the time that Ryan Cohen talked about taking over the board or talked about his new strategy.

And I think that, you know, they found people who traded unusual amounts of stock, Joe Blow and his cousins. And they're trying to see if there's any link to some employee at GameStop. The company's announcement said, it's not expected to have any material impact on [? the ?] [? business. ?]

So to the extent that there is an employee who leaked information, as far as we know, it's, you know, somebody who worked for the general counsel or, you know, maybe a janitor pulled a-- who pulled a piece of paper out of the trash can. I mean, we don't know. I would really be shocked if it was anybody related to Ryan Cohen, any board member, or any C-level executive. So I'm not worried.

If the SEC finds something and they prosecute, it's probably gonna be a small fish. If they don't find something, even better. And it's their job to investigate. So I would brush this off as a non-event until we hear who they're targeting in particular.

- Michael, where do you think fair value is on this stock right now? I mean, it sounds like you're optimistic that these new moves, at least at the executive level, could bring about a change in strategy, which any change, you could argue, would be good for GameStop. But if-- if you've got a $50 price target, $262-- I mean, where do you think it should be valued at right now?

MICHAEL PACHTER: You know, I'm-- I'm modeling something around $5 and 1/2 billion of revenue two years out and $1.35 in earnings, so, you know, round numbers-- $100 million of profit. You know, that's a couple percent. It's entirely possible that they come up with some really innovative strategy, and they grow revenue by $1 and 1/2, $2 billion more than I modeled.

You know, their gross margin's about 25%. They might be able to capture, you know, maybe 10 percentage points of that as operating profit. So, you know, it's entirely possible that they-- that they exceed my estimate by $150 million or so. And that would be awesome. And that would mean it's probably worth somewhere around $75 a share.

It's just-- you can't come up with a construct that justifies $250 unless you think they're going to triple revenue and grow operating-- operating margin to the highest in the retail industry, which is roughly 5%. I-- I do not see how these guys ever get to 5% operating profit, ever. And, you know, if they've got a strategy to do so, that's awesome. When they tell me, then I will tell you whether or not that makes sense to me. But I'm not going to guess.

You know, I read the tweets just like you guys do. I see the gif from "Ted" where the teddy bear is smoking a bong. And I go, are they gonna sell cannabis? You know, I see the McDonald's soft serve ice cream. And I go, are they gonna sell ice cream? I see the pets.com sock puppet. Are they gonna sell pet-- pet supplies? I don't know what they plan.

I personally think Ryan Cohen is a goofball. I think Elon Musk is a goofball. And they have fun on Twitter. God bless them. That's what Twitter is for. But I think retail investors are trying to read into something. And I'm not sure there's anything there yet.

- Well, thank you for not pulling any punches there. Michael Pachter, Wedbush Senior Analyst, thank you for joining us.