On April 3, 2020, GameStop’s (NYSE: GME) stock price was at its all-time low of $2.80 and nine short months later, on January 28, 2021, its stock price hit its all-time high of $483, an increase of over 17,000%. No, the company didn’t shatter earnings expectations or anything of the sort to merit the astronomical surge—it was the target of a short squeeze initiated by investors from the ‘wallstreetbets’ subreddit. This happens when short sellers need to buy shares to cover a stock price’s rise, often compounding the issue by driving the price further up. The short squeeze isn’t over yet as even at the time of writing , the stock price is over $270, a very high over-valuation for the company.
The problem with GameStop
Aside from being a risky investment that is being manipulated, what exactly is wrong with GameStop? Obsolescence. Like everything else, video games are going online and GameStop’s biggest profit-maker is used game sales at physical stores and there’s no such thing as used video games online. The company recently hired Chewy founder Ryan Cohen to head its e-commerce division as it tries to pivot completely online. It also streamlined its operations by culling 11% of its underperforming brick-and-mortar locations and cut selling, general, and administrative (SG&A) costs by over $315 million in the first three quarters of fiscal 2020. Should the company be successful in its ambitions, it still won’t be profitable until 2023 so it’s better to invest in a stable, profitable, growing company like Facebook (NASDAQ: FB) instead.
Why invest in Facebook?
Facebook, the ‘F’ in FAANG, reported its highest revenue ever in 2020 of nearly $86 billion, a 21% increase from the previous year, and earnings per share (EPS) of $10.09, up nearly 57%. The social media titan saw an increase in daily active users (DAUs) of 11% year-over-year (YoY) to 1.84 billion on average. That’s significant to say the least, and although CEO Mark Zuckerberg wasn’t initially interested in monetizing his site, today, advertising income accounts for over 95% of the company’s total revenue. In fact, according to World Advertising Research Center, Facebook received a third of all digital advertising dollars spent in 2020.
Business wasn’t impacted by the pandemic as people were forced to stay at home and companies realized that they needed to continue using Facebook if they wanted to reach up to a third of the world’s population in a targeted fashion. With a total of 2.8 billion members using Facebook products at least once a month and the company holding a commanding 69% social media market share, the company remains resilient even after threats of boycotts as demonstrated earlier last year. The biggest threat the company faces to its advertising revenue comes from Apple’s release of iOS 14.5 this month, which will prompt users if they want to allow an app to track their activity.
It’s a significant threat but the company is already employing a number of workarounds to the new framework and I reckon they’ll be alright. Facebook has been monetized but its sibling companies, Instagram and WhatsApp, have not yet been. Instagram has over 1 billion members and WhatsApp has 2 billion and those are very enticing numbers when it comes to advertising as you can literally reach a huge fraction of the world’s entire population.
Facebook has also expanded into hardware with its acquisition of virtual reality (VR) company, Oculus, in 2014, and today holds a leading 39% of the VR market. The VR market is projected to reach over $56 billion in value by 2025, and obviously as the market leader, Facebook will see a large portion of the profits. The company, with a $750 billion market cap is next in line for a trillion-dollar valuation in the U.S. and if it continues growing its membership and advertising audience, there is little doubt that it will cross that threshold in the near future.
A MyWallSt subscription gives you access to over 100 market-beating stock picks and the research to back them up. Our analyst team post daily insights, subscriber-only podcasts and the headlines that move the market. Get your free access now!
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.
Contributing Writer at MyWallSt
David fell in love with the stock market in 2000 after making $30,000 overnight on Techniclone. His favorite stocks today are Netflix, Google, Amazon, and Apple as they are the market leaders in their sectors and are safe long-term investments.