We have had a weakish start to the week, with fragility in risk markets surfacing early in Monday’s European session caused by surprising advances of right-leaning parties in the European Parliamentary elections held on Sunday.
This update will discuss:
Apple: what gives?
Apple ($AAPL) started its Worldwide Developers Conference on Monday, featuring product enhancements and software updates, many wrapped around “Apple Intelligence”, the company’s inaugural push into artificial intelligence. The company also announced a partnership with Chat GPT creator OpenAI to power the new features. The headline announcements on Monday initially provided little inspiration to AAPL shares, which fell on Monday even though the “AI theme” was promoted heavily (which normally provides an uplift). However, on Tuesday morning, AAPL’s shares caught a bid, and the delayed effect caused the stock to take off like a rocket as the stock posted its largest single-day gain that I can remember (and reached a record high). The shares were up $14.03/share (7.3%)
yesterday, closing the session at $207.15/share. AAPL shares – often considered the most “boring” of the Mag 7 stocks – has run from a low of $164.78/share (close) on April 19th to $207.15/share (close)yesterday, an amazing gain of 25.7% in just under eight weeks. And this period included the release of the company’s second quarter results (here), which were far from inspiring (recall iPhone sales down 10%, etc). What gives with this run? This is not ordinarily the way that the AAPL stock we have come to know and love behaves, although uttering the words “AI” often enough seems to inspire some magic in most company stocks. Whatever the reason, I hope you own shares in this runner, although I must admit that I lightened ever so slightly into this crazy rally just to take some money off the table (and address a small covered call position).
Today is CPI and FOMC day: what to expect
We have some important economic data being released the remainder of the week, including CPI data this morning, as well as an FOMC decision this afternoon.
CPI for the US (and China), today: Headline and core CPI in the US is expected to be little changed in May, as you can see in the table below. US CPI will be released before the market opens today at 830 EDST.
FOMC decision: To be announced this afternoon at 2pm EDST, with a press conference featuring Chairman Powell to follow at 230pm EDST. The FOMC will also release a new set of economic projections. No change in monetary policy is expected. As usual, what will matter most is what Mr Powell says about the timing of potential monetary policy easing in the meetings ahead.
PPI for the US will be released on Thursday and the Michigan consumer confidence survey on Friday.
GME and Roaring Kitty’s bizarre diatribe last Friday
I recently listened to some of Keith Gill’s rambling live stream from last Friday regarding GameStop, which marked Roaring Kitty’s return to YouTube following a nearly three years absence. Personally, I found it a rambling load of mumbo-jumbo that failed to enlighten me a single iota as to why an investor should invest in GameStop (GME). To say it was strange is in fact an understatement, and moreover, it seemed to have little influence as far as the shares. GME opened Friday morning at $37.69/share, hit its intraday high of $$48.00/share early in the session, then bounced around before beginning a slide just as Roaring Kitty finished his presentation, closing the day at $28.22/share (down 25.1%). To be fair, the company also released its first quarter earnings (quarter ended May 4, 2024) that morning and announced a new share offering before Mr Gill’s YouTube presentation. The 1Q24 earnings (here) were not good at all. 1Q2024 sales were $882 million, compared to $1.237 billion for the same quarter of 2023, a very sharp decline.
For those not familiar with GameStop, the company is a retailer of mainly video games and related video merchandise, operating 4,169 stores in the US (70%) and in Canada, Australia and Europe (collectively 30%). GME had $4.9 billion in rolling four-quarter revenues (quarter ended May 4 2024), EBITDA of $105 million and bottom line net income of $45.5 million. The company has a market cap of $8.8 billion, so first let that sink: GME’s market value is 84x TTM EBITDA and 193x TTM earnings (P/E ratio). I don’t know – to me that seems a bit rich. Unlike say NVIDIA, GameStop does not boast 70%+ gross margins or have a history of quarterly double-digit earnings increases or have a dominant market position in an emerging technology. Rather, the company operates in a decaying industry (store front retail) that – similar to DVD’s migrating to streaming – has moved from physical game cartridges to downloadable and on-line games. In summary, GME is a company with very bad fundamentals, deteriorating operating performance, and a poor outlook.
While the company has loads of operating issues – not to mention the complete lack of a vision and strategy to dig itself out of its growing hole – access to liquidity in the near term is not an issue at the moment. The company completed an at-the-money offering of 45 million shares on May 24th, raising $933 million. Pro formaafter that offering, the company would appear to have around $2 billion of cash. And if that’s not enough, GME announced that it would issue an additional 75 million shares on June 7, the same day that the company released their disappointing earnings. The offering apparently was completed yesterday, with the company raising an additional $2.1 billion, increasing the company’s (pro forma) cash hoard to around $4 billion!
In his Friday diatribe, Roaring Kitty said little about the company’s fundamentals, but expressed strong confidence in its largest shareholder and CEO Ryan Cohen, who began accumulating shares in GME in 2017 and now owns around 10% of the company. I can’t find anything from Mr Cohen or the operating management team of the company about a strategy that might revive the company’s fortunes. I read somewhere that Mr Cohen has suggested that the company might use its substantial cash on hand to invest in new (i.e. different) businesses rather than develop a new operating strategy for the core business of GameStop. It is all so murky and unclear, but this doesn’t seem to bother meme investors in the lest.
The reality is that company – and hence the stock – look like a charade. However, as we learned in 2021, company fundamentals are only part of the story, especially for this stock. Mr Gill has an army of retail GME investors as supporters who have remarkable influence over the direction of travel of the company’s shares, rallying behind Mr Gill’s substantial investment in the company and his willingness to hold his position even when the shares are falling sharply. The shares also gain momentum from short sellers having to cover their positions, a familiar story harking back to the run of GME above $500/share back in 2021 during the meme stock frenzy.
I would dismiss this entire story as nothing more than sensationalist financial news, except that it’s hard to ignore that Mr Gill has gone from his “day job” as an analyst at a New England insurance company a few years ago to becoming enormously wealthy off his conviction in GME. I do not think he is doing anything illegal as is suggested at times. Rather, I think he is singularly focused on one name and invokes confidence in his followers. Two things make Roaring Kitty a very interesting character.
Mr Gill’s portfolio – if that is the proper way to characterise it – is built around a one high risk position and cash. Mr Gill has freely shown his hand by displaying his brokerage account at E*Trade on X, showing the very sizeable and concentrated bet on GME via cash shares and near-to-maturity call options. Think what you may about Mr Gill, but he clearly has enormous confidence and conviction, putting what must be a substantial amount of his net worth on the line in one stock. And it happens to be the stock of a company that appears massively over-valued, even though this seems to be a sideshow to investors who are Mr Gill’s de facto disciples.
Mr Gill has largely been responsible for the very volatile swings in GME shares over the last few weeks, with no underlying fundamental support in terms of company developments. GME part II all kicked off with Roaring Kitty posting on X (formerly Twitter) several weeks ago for the first time in nearly three years, reigniting his enthusiastic supporter base (Twitter feed here). In the live stream on Friday, Mr Gill offered no ideas for turning around GameStop, but enthusiastically conveyed his confidence in Ryan Cohen’s ability to right the proverbial ship. In fact, he hardly mentioned company fundamentals at all, especially strange in that the live stream followed the release of horrific 1Q24 results earlier that morning. His die-hard base of followers are willing to rally behind him, in the process leaving a carnage of short sellers that see a troubled and over-valued company, but are powerless to see off the army of momentum retail investors. Being short GME not only provides fuel to the fire during short covering, and has also destroyed more than one short-focused hedge fund in the past. The reality is that even though company fundamentals scream “sell”, Mr Gill’s followers don’t care one bit.
I am not involved in GME, and would not be because I view it as a company whose valuation is completely divorced from its fundamentals. That’s simply not my cup of tea, but go right ahead as long as you know what you are getting into. But play the side you wish to be on for the long-term, because as we have seen with Tesla ($TSLA), falling to Earth can take a long time but does usually happen for highly over-valued stocks.