As the kitty roars

Stocks had a mixed close yesterday as investors awaited, on seat edge, for today’s and tomorrow’s big inflation numbers. A number which not too many people watch, the NY Fed’s 1-year Inflation Expectations, showed that folks have raised their expectations about inflation over the next year – not what the Fed wants to hear.

In with a roar. I can’t believe that I am writing about Gamestop in 2024. There are 2 bloody wars going on, interest rates are higher than they have been since I had a full head of hair, inflation is stubbornly high, and corporate earnings just blew the pants off analysts’ estimates. Forget all that stuff. Some dude named Roaring Kitty Tweeted a meme for the first time since – I don’t know, because I don’t follow him – well, a long time ago. He implied that Gamestop (GME) was worth a look. Thanks for that, Roaring Kitty. Should I show you a chart of how the stock rose by +74.40% yesterday? No, maybe a snapshot of how it is up by +100% in the premarket on super-high volume. No, you don’t need to visualize it to know that those are big gains. Ok, so first, Roaring Kitty is not just “some guy” as I portrayed before. He is the online “stonk” bro that started the meme-stock craze in 2021… with this very stock. He made millions and there is even a movie about him. He got a haircut, a nice car for his brother… and a dog. I am happy to know that he has not set his sights on pickleball just yet and that he is still in the game, so let’s have a look at Gamestop. Let us start with the following chart.

Roaring Kitty first got involved in Gamestop around 2019 stating that it was undervalued, but it wasn’t until early 2021 that he became famous as hordes of chatroom, armchair, day-traders rushed in to buy the stock, which at the time had a very large short-interest, meaning lots of folks were betting it was going to go down, including some very large hedge funds. Anyway, it was a big deal in the calculous of Mr. Kitty that Ryan Cohen, founder of Chewy, joined on as CEO and started to buy his own company’s stock. Mr. Cohen has been at the helm since. Let’s see how he has done since meme-stock mania gripped the globe. Well, Return on Assets and Return on Equity is still negative, but admittedly they are improving. HOWEVER, those are both accounting-based numbers and can easily be distorted. I probably should have shown you return on invested capital which included public stock and debt. In that case you would see an improvement as well, however if a stock goes down and income stays the same, you would expect to see an improvement. In this case Net Operating Profit After Taxes has indeed improved a bit, hovering ever so slightly in the green, however the company’s stock is… um was until yesterday, well below its levels a few years ago. Let’s look at margins in the above chart. Gross Margins which is basically total revenue minus cost of goods and services. That is kind of the same but trending slightly lower on the longer term. How about operating margins? That factors in operating expenses. Often, good management is able to lower costs and get the same income. The efficiency is rewarded with higher EPS and… presumably stock gains. That is a real test of Cohen’s skill. Well, as you can see by the chart’s bottom-most panel, Operating margin has improved ever so slightly, but is really in a sideways trend. So, meh.

Now that you have had your look, what do you think? Not too bad right? The next question is the toughest question. What is the stock worth. From the time I started writing this post early in the morning to the time I put my final touches on it the stock went from $42 to $71 in the premarket. Let’s have a quick look at annual sales. The company’s 2021 revenue was $5.089 billion, and its 2024 revenue was $5.272 billion (the company’s fiscal year ends in calendar Q1). That is a growth of +3.6%. Analysts are expecting the company to earn $4.794 billion in this current fiscal year, which, if it happens, would mean a decline in sales over the period. Impressed enough to buy a stock that rose almost +78% in one day and +100% in the next morning? Let’s look at NVIDIA for just a second. Over the same period, its revenues went from $16.7 billion to $60.922 billion, and analysts are expecting it to earn revenues of $113.4 billion in 2025. NVIDIA has certainly enjoyed some gains over this year and last, but it would seem that in this case, they may be warranted. Now, I know that there are many other factors involved in this. NVIDIA is a $900 stock and Gamestop is a, um… was a $29 stock a few days ago, and retail investors don’t like stocks with high absolute price tags. There are many other factors – all weird, but alas, I must send this to my editors and get on with my day. I am sure you will be hearing a lot about Gamestop today. Perhaps we will hear from Keith Gill on why he thinks the company is worth a close look. Keith Gill is the version of Roaring Kitty with the haircut and the dog.

YESTERDAY’S MARKETS

NEXT UP

• Producer Price Index / PPI (April) is expected to increase to +2.2% from +2.1%. PPI is considered a leading indicator of CPI, so folks are paying attention to it 😉.
• At the Fed: Governor Lisa Cook will speak as will Fed Head Jerome Powell.