Telsey Downgrades GameStop, Expects Shares To Return To A 'More Normal' Valuation

Shares of GameStop Corp. GME soared nearly 1,000% since Telsey Advisory Group upgraded the stock in September and the run "far exceeds our high fundamental expectations."

The GameStop Analyst: Joseph Feldman downgraded GameStop from Outperform to Underperform with a price target lifted from $22 to $33.

The GameStop Thesis: GameStop's run higher over the past two weeks can be attributed to a massive short squeeze and to a lesser extent renewed optimism that the new console cycle will support sales of physical games Feldman wrote in the note. But the stock's current valuation is not sustainable as it's trading at a large premium to its peers.

Related Link: GameStop's Confounding Rally Leads To One Of Its Largest Investors Turning Neutral

Specifically, shares of GameStop were trading at 33 times next 12 months EV/EBITDA and this is "well ahead" of leading retailers and GameStop's own 10-year average multiple of four times and a 10-year peak of seven times.

"We expect the shares to return to a more normal/fair valuation driven by the fundamentals," the analyst wrote in the note.

A more realistic price target of $33 is based on eight times EV/EBITDA on 2022 EBITDA estimates of $254 million. Under a more bullish outlook where the company achieves an operating margin of 4% to 5% (instead of current expectations of 3%) it would result in EBITDA of $312 million to $370 million and command a stock price of $40 to $47.

GME Price Action: Shares of GameStop peaked at around $136 during Monday's early morning trading session and were seen trading higher by around 68% at $109.22 at publication time.