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GameStop's Stock Is Trading At A 42% Discount, Says Morningstar

A recent report from the investment research firm indicates GME shares are trading at a significant discount. Here's what investors need to know.
  • According to Morningstar's latest mid-September report, considering the share price of $28.6, GameStop's shares would be trading at a 42% discount.
  • Morningstar rates GameStop as moderately undervalued for its fair value, with a 4-star star rating.
  • Morningstar's fair value estimates consider retroactive share prices, however, GME has a "very high" level of uncertainty according to the report.
Figure 1: GameStop's Stock Is Trading At A 42% Discount, Says Morningstar

Figure 1: GameStop's Stock Is Trading At A 42% Discount, Says Morningstar

(Read more from Wall Street Memes: GameStop Stock: 71.3 Million Shares Directly Transferred To Transfer Agent)

Morningstar's Latest Report On GME

According to a recent Morningstar report, the fair value of GameStop  (GME) - Get GameStop Corporation Report should be $49. This would indicate a discount of about 42% from its $28.60 share price on September 16, the day the report was released.

Morningstar also assigned GameStop a four-star rating, indicating that the stock is moderately undervalued and trading at a certain discount to its fair-value estimate.

Morningstar's estimate of fair value is calculated based on the estimated long-term intrinsic value of the stock and considers the quantitative analysis of fair-value estimates based on backward-looking price movements.

The estimate is also based on the amount of cash the company is expected to generate in the future, taking into account the future cash flows listed as an "uncertainty rating" — which Morningstar rates as "very high" for GME.

However, GameStop's price/fair-value ratio of around 0.6 indicates that GameStop's stock price is below fair-value estimates.

Morningstar also provided an economic moat rating. This is a representation of how sustainable the company's competitive advantages are.

In GameStop's case, the rating is "none," indicating that Morningstar probably views the stock as undervalued based on its recent trading history — not necessarily due to business fundamentals.

Bullish, But Not as Bullish as the Previous Report

While Morningstar's fair-value report was bullish on GameStop, the report the firm released in mid-July was even more so.

Back then, the stock was on the rise due to its 4-for-1 stock split. And Morningstar's estimate for GameStop was $55.39.

However, in July, Morningstar gave GameStop's stock only three stars, indicating that the firm considered the share price at the time — $34.05 — fairly valued. Back then, the video game retailer's uncertainty rating was also high.

An Exception Among the So-called "Smart Money"

Morningstar's bullish view on GameStop's valuation is an exception among the so-called "smart money" consensus. The rest of Wall Street views GameStop with a hint of disdain and is still largely unaware that GME is one of the most popular stocks — if not the most popular stock — on social media.

Arguably, analysts and investment firms have done their jobs by analyzing GameStop from a business fundamentals perspective.

But considering GameStop's unconventional trading activity after the meme boom of January 2021, should analysts take into account only the company's fundamentals when considering GameStop stock?

Looking at only the fundamentals and not taking into account the impact of the "meme frenzy" gives us an incomplete story when it comes to GameStop.

Ideally, an opinion on GME should not underestimate the ability of retail investors to support very high price levels in the stock for a long period of time. 

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)