Why You Should Ignore Citron and Buy GME Stock Before the Turnaround
Source: Getty Images

Why You Should Ignore Citron and Buy GME Stock Before the Turnaround

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Jan. 22 2021, Published 7:12 a.m. ET

With a 128 percent return this year, GameStop (GME) stock is among the biggest gainers so far. Furthermore, the stock has risen more than 800 percent over the last year and almost 1,600 percent from its 2020 lows. Several investors have lost their shirts betting against the company. Noted short-seller Citron expects GME stock to plunge. Should you ignore Citron and buy the stock?

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There are several reasons GME stock is rising. The company’s strategy of shutting down stores and focusing on online sales is paying off, with e-commerce sales now accounting for over a third of its sales. Also, activist investor RC Ventures, led by Ryan Cohen, reached an agreement with GME, which further boosted the stock.

Who is Ryan Cohen and can he turn around GME?

Cohen’s hall to fame is his role at Chewy, where he took on Amazon and made Chewy the “Amazon of pet foods.” Where many companies failed in taking on the giant, Cohen created a success story with Chewy, which he later sold to PetSmart for $3.5 billion in 2017. Cohen might be regretting that decision, given that Chewy is now listed and has a market capitalization of over $43 billion.

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Why You Should Ignore Citron and Buy GME Stock Before the Turnaround
Source: Facebook / GameStop

Citron Research on GME

Citron Research sees GME stock falling to $20. Andrew Left of Citron is ultra-bearish on GME stock, sees it in a “terminal decline," and thinks short interest in the stock is justified. In addition, he pointed to the stock's high valuation multiples, highlighting that the stock trades at 42 times its NTM (next-12-month) EBITDA.

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Left also compared GME stock to Tesla. Short-sellers have been struggling with Tesla, among the most shorted stocks. They lost $40 billion last year as Tesla stock grew over 700 percent. Left pointed out that while there was euphoria over Tesla, there was a story to it.

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Is Andrew Left right about GME stock?

To investors focused on NTM multiples, GME would look overvalued and they may agree with Left. That said, GME looks like a long-term turnaround story. The company is focusing on online operations and choosing profitability over revenue growth.

Investors should also look beyond GME's NTM numbers. The same holds true for many other stocks, including NIO. The electric vehicle stock has soared despite negative comments from Left.

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On Jan. 21, Citron Research was scheduled to do a live stream on the top reasons the stock is a "sell." However, it canceled the stream, tweeting that its Twitter account had been hacked.

Can GameStop become the “Amazon of gaming”?

In my view, markets are biased toward "new economy" stocks. NIO, Tesla, and gaming stock Roblox command eye-popping valuations. Meanwhile, "old economy" stock valuations are depressed. In the automotive stock space, Ford and General Motors have spiked this year as markets are rerating them after years of neglect.

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Why You Should Ignore Citron and Buy GME Stock Before the Turnaround
Source: Koyfin

GME could very well be the “Amazon of gaming,” as many are projecting. I would bet on Ryan Cohen proving Andrew Left wrong on GME stock. The demand for gaming is rising quickly, and GME is well positioned in a lucrative industry, with a strong brand and fan following. Investors focused on NTM numbers have missed out hugely on Tesla and NIO stock, and the same could happen with GME.

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