We’re not sure that Tesla has things figured out. Social media entities, including one of our favorites Facebook, have fallen on hard times given negative sentiment. GameStop could sell itself for a significantly higher price than what the market is currently willing to exchange shares.
By Brian Nelson, CFA
Let’s get one thing straight: we have a tremendous amount of respect for Elon Musk.
He is a tremendously successful person and entrepreneur, but some of the things he has done during the past few months have been puzzling. We think we might be able to understand some of the pressures involved in running a business and trying to satisfy a growing list of customers (and skeptics), but what makes Elon Musk different is that he is a CEO of a publicly-traded company, and that means he has to be extremely careful in how he communicates publicly to all of his stakeholders.
From tweeting that he was considering taking Tesla (TSLA) private at $420 per share and that he had funding secured to a variety of other unusual spats on Twitter (TWTR), things have taken a turn to the absurd. We like Elon’s vision and perseverance, but from securities-related lawsuits to ongoing operational hurdles and cash burn, it is really difficult to be a shareholder of Tesla these days. Has this new car company with a grand idea finally met its match? We value shares at ~$280 each at the time of this writing, and that’s about where they are trading at the moment. What a story Tesla has been in 2018. Though not immune to widely-publicized tariff troubles, General Motors (GM) remains our favorite idea in the automotive space.
The market is truly challenging our conviction in Facebook (FB). As with many market participants, we were blindsided by a second-quarter report that essentially revealed the company taking conscious efforts to slow growth and increase spending, impacting the magnitude of expected profit performance in coming years. Though we thought Facebook’s shares were undervalued going into the quarter, and even after factoring in reduced expectations after the quarter, the stock just flat-out is not acting “right” these past few weeks. The market is well-aware of Facebook’s massive net cash balance sheet position, considerable network effect (one of the best competitive advantages), and its solid free cash flow generation, but the selling doesn’t want to let up for some reason.
Facebook’s COO Sheryl Sandberg and Twitter’s CEO Jack Dorsey testified at a Senate panel September 5, and investors continue to be on edge about whether regulatory and legal action might heat up against social media (SOCL) entities, but still, the sell-offs across the social media arena, including Snapchat (SNAP), have been considerable. We continue to like Facebook for myriad reasons, but if Facebook and Twitter believe that they will be able to spend to “police” their websites, effectively “controlling speech,” we don’t think it can be done, nor should it be done. We think the best move for investors is to wait and see how things pan out in the coming quarters, but we just can’t help but feel we might be wrong on the Facebook idea given its pricing action of late.
High-yielding used-video game retailer GameStop (GME) has had a volatile few weeks, and Seeking Alpha has reported that the company has gone formal with the sales process. Many are calling for a deal to be completed in the $22-$23 range, and that’s about where we value shares. The company posted mixed second-qarter results September 6, but it did reaffirm its fiscal 2019 bottom-line guidance in the range of $3.00-$3.35, the midpoint of which came in above consensus expectations. Though GameStop’s business model is under serious attack give the digitization of the gaming landscape, the company is worth something to private equity in runoff mode as it remains a solid free-cash-flow generator. We’re not sure management will keep paying a near-10% dividend yield (only because it doesn’t have to) but shares not only have potential buyout support but also a rather sizable dividend to prop them up. We think the end game is a binary one for GameStop — either the company sells itself to a bidder at an above-market price, or its equity struggles lower as industry forces overcome its business model.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.