Investing is important and wealth altering. It can even be fun with the right approach to due diligence. Unfortunately it can also be dangerous, especially when it’s uninformed speculation masquerading as investing.
There’s a lot of buzz for Norwegian Cruise Line Holdings (NYSE: NCLH) and GameStop (NYSE: GME). The bullishness in both of these stocks may be passionate, but it’s not based on actual improvement in fundamentals. Let’s go over why these two trendy stocks could be silent wealth killers.
1. Norwegian Cruise Line Holdings
A stock chart doesn’t tell the whole story. Pull up the visuals on Norwegian Cruise Line and you’ll see a stock that has been cut by more than half since the start of last year. The shares entered 2020 at $58.41, and they closed at $27.97 on Monday.
An inexperienced investor may approach this as an opportunity. If Norwegian Cruise Line can return to where it was before the pandemic — after a record 2019 — the shares could double from here. The math on the valuation exercise isn’t as kind. The country’s three largest cruise lines have collectively raised more than $40 billion in financing to stay afloat, and they’ve already burned through a good chunk of that after generating no meaningful revenue for more than 13 months. Whether it’s through debt that needs to be paid back with interest and bloats the balance sheet or equity offerings that expand the share count, this isn’t the same cruise line operator as before.
This brings us to enterprise value, which takes into account market cap (where the share price is multiplied by the number of shares outstanding) and then adds a net debt position or subtracts a net cash position to arrive at what a business would be worth if it was going to be acquired. Norwegian Cruise Line had an enterprise value of $18.3 billion at the end of 2019 when it was near its peak performance. Today, the stock has been cut by more than half but the enterprise value is at $19 billion. In short, Norwegian Cruise Line is valued as if it’s already better than the same company that was profitable with nearly $6.5 billion in revenue running a full fleet of ships with negligible vacancies. It will take years to get back there.
You don’t need to compare enterprise values to see how GameStop has appreciated in value using the same starting line as Norwegian Cruise Line. The video game retailer’s stock is a 27-bagger since the beginning of last year. A strong argument could be made that GameStop — discarded by investors in the single-digit clearance bin by the end of 2019 — was oversold at the time. With video game software sales going digital directly from publishers and console makers was there really a place for a small-box strip mall chain that derived its thickest profit margins from the resale of secondhand games and gear?
Lost in the whole “meme stock” flurry that sent GameStop to frenzied all-time highs in late January is that it trounced the market in 2020, too. There were already rumblings of a turnaround with fresh activists dreaming out loud and visions of stepping out from the footsteps of Radio Shack and Blockbuster Video.
The problem here is that the valuation doesn’t make sense without a viable turnaround strategy. GameStop stores used to be money machines, but the retailer has now posted three consecutive fiscal years of huge losses on sharp revenue declines. It is ringing up a little more than half of the sales it was generating at its peak five years ago.
It’s not going to transform itself overnight into a fourth viable console maker or a third mobile operating system so it can control digital distribution. It’s not going to launch a streaming video platform that will topple Amazon‘s Twitch. It has closed 12% of its stores over the past year, but it can’t go to zero and hope to become an e-commerce juggernaut without the local connections.
The best aspirational blueprint among retail stocks for a successful restart from the brink of expiration in consumer electronics would be Best Buy, but GameStop bulls aren’t going to like the fiscal comparison to the superstore chain. GameStop is already trading at four times the revenue multiple of a well-received Best Buy. GameStop is not Best Buy, and — at this inflated price point — it’s not a best buy either.
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