Why BofA Says GameStop In 'Weaker' Place, Sees Downside To $10

Video game retailer GameStop Corp. GME traded above $350 per share Wednesday amid a massive short-covering bonanza, but the company is in a "weaker" place than it was before the rally, according to BofA Securities. 

The GameStop Analyst: Curtis Nagle maintains an Underperform rating on GameStop with a price target lifted from $1.60 to $10.

The GameStop Thesis: GameStop's stock is up more than 600% since a rally started to pick up momentum on Jan. 12, Nagle said in a note. 

A disconnection exists between the stock and reality, as the company's multiyear streak of "very weak" performance was evident in holiday 2020 sales. U.S. hardware and software sales in December were up 23%, but GameStop reported negative 5.5% comp sales, the analyst said.

The addition of Chewy Inc's CHWY founder and ex-CEO Ryan Cohen to GameStop's board was viewed as a step in the right direction, as it reinforces the urgency of a shift toward digital sales, he said.

The addition of Cohen is not enough to offset structural pressures that will accelerate in the new video game console cycle, Nagle said. 

Related Link: Melvin Capital, Citron Throw In Towel And Cover GameStop Short

Most notably, a shift to digital sales is a negative for earnings, the analyst said.

If GameStop manages to notably increase online sales, it loses the opportunity to sell in-store customers the high-margin pre-owned and collectibles merchandise that accounted for around 46% of total gross profit dollars in 2019, according to BofA. 

GME Price Action: Shares of GameStop peaked at $354.83 Wednesday morning and were trading up 137.82% at $347.21 at last check.