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How Much Did Citron Lose on GameStop?

Shares of Dell Technologies ( Dell Technologies stock price in GameStop ) fell as much as 7.5 percent on Tuesday after the company reported a second-quarter net loss and said it would take charge related to its previously disclosed payment to Carl Icahn.

The charge relates to a $2 billion investment from activist investor Carl Icahn, who has pushed Dell to complete an acquisition of storage company EMC Corp and then break itself apart.

1. What is Dell Technologies?

Dell Technologies is a holding company that was formed on June 4, 2017, by the merger of Dell and EMC Corporation. This new company has a broad, technology-based portfolio of businesses, including Dell’s enterprise products and services, Pivotal Software, RSA, and VMware; EMC’s security, virtualization, storage, and information management businesses; and VMware’s cloud infrastructure, vRealize and hybrid cloud businesses. The merger was announced on September 7, 2016, and the combined company became operational on October 31, 2016.

2. The reason behind the loss

For the second quarter, Dell Technologies reported a net loss of $721 million, or $1.36 per share, compared with a loss of $2 billion, or $3.90 per share, a year earlier. Excluding one-time items, the company reported a profit of $1.11 per share.

Adjusted revenue for the period was $18.19 billion, compared with $13.3 billion a year earlier. According to Thomson Reuters, analysts had expected Dell’s earnings to be $1.04 per share on $17.2 billion in revenue. The company’s shares fell more than 5 percent in extended trading.

3. A small snippet of Citron’s research

Citron Research’s Andrew Left on Tuesday published a report on Dell Technologies Inc. that claimed the computer giant lost $1.9 billion on its investment in GameStop Corp. GameStop shares fell 10.7 percent to $8.05, a three-month low. Dell shares were down 1.8 percent to $22.65, also a three-month low.

4. Dell Technologies’ second-quarter loss widens on restructuring charges and taxes

Dell Technologies Inc said it lost $5.5 billion in the second quarter and expects to lose about the same in the third quarter, widening its net loss for the year and sending its shares tumbling in after-hours trading.

The company, formed from the merger of Dell and EMC, has been struggling to integrate the two companies and has not produced a quarterly profit since its creation in October.

5. Dell Technologies posts second-quarter loss of $197 million, or 13 cents per share

Dell Technologies Inc. reported a second-quarter loss of $197 million, or 13 cents per share, worse than the $193 million loss, or 12 cents per share, it recorded a year ago. The Round Rock, Texas-based company, which took over data-storage company EMC in 2016, also reported revenue of $19.4 billion for the quarter, which missed the $20.1 billion analysts surveyed by FactSet were expecting.

6. Why Citron is bearish on GameStop and Its Stock

In a report released Tuesday, Citron Research analyst Andrew Left said Dell Technologies Inc. (DVMT) lost $1.9 billion on its investment in GameStop Corp. (GME). The citron said the loss came as a result of the company’s reverse stock split in February, which created a new class of common stock with different voting rights.

Citron said the move made GameStop’s shares less valuable, and that the stock went from trading at $34.24 per share in January 2017 to $15.10 per share Tuesday, a 47% decline. The citron said it expects GameStop’s stock to fall below $10 per share in the next 12 months.

7. Citron’s bearish thesis on GameStop:

“The company is being propped up by a stock buyback, there is no more margin pressure, and the company’s average customer is over 55 years old,” Left said in an interview. Left also claimed the stock is currently overvalued.

GameStop’s stock dropped as much as 6.7 percent following the Left’s comments. The stock is down more than 4 percent year to date, while the S&P 500 index is up 12.6 percent.

Conclusion

The bull thesis for GameStop Corp. (GME) is that the retailer of physical video games will be able to stand out from its competition in the wake of the increasing popularity of digital downloads. Citron Research, however, is not buying this argument. The firm says that even if digital downloads continue to dominate, GameStop would not be able to compete with Amazon.com, Inc. (AMZ

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