There’s been plenty of talk about GameStop (NYSE:GME) stock going to the moon in 2021. At the same time, there’s been plenty of people pounding the table that the stock is overvalued.

Retailers

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For sure, GME stock is overvalued compared to where it was just a year ago. The stock is up 4,760% in the past 12 months. But GME stock bulls would argue that short sellers had simply made the stock extremely undervalued a year ago.

Unlike the cryptocurrencies that are popular on social media these days, stocks actually represent ownership stakes in real companies. By looking at the relative valuations of these stocks and their underlying businesses, it actually is possible to get a sense of how expensive one stock is compared to another.

Here’s a look at whether or not GME stock is actually overvalued and what a rough fair market value for it actually might be.

GME Stock Peers

There’s no question GME is a story stock. Its business is in a terrible place. In the first quarter, GameStop reported $1.28 billion in first-quarter revenue, down 17.4% from pre-pandemic numbers in 2019. The company also reported a net loss of $66.8 million. If GameStop continued to report numbers like that over the next 10 years, it’s hard to argue against the idea the stock is overvalued.

Instead, GameStop bulls believe in the long-term story. They say GameStop will transform itself into a modern retailer that can grow revenue and generate profits.

Today, I’m going to choose two groups of GameStop retail peers to compare the stock to. The first group of peers is retailers that are struggling to generate revenue growth and are losing money, just like GameStop is today. The second group will be retailers that have found a way to adapt to the modern landscape and are both growing and profitable.

For the current peer group, I’m using Bed, Bath & Beyond (NASDAQ:BBBY), Abercrombie & Fitch Co. (NYSE:ANF) and Party City (NYSE:PRTY). Like GameStop, these retailers have struggled to change their business models to thrive in the modern times. Earnings and revenue declined sharply in recent years. All three generated heavy losses in 2020.

For the profitable growth stock group, I’m using Williams-Sonoma (NYSE:WSM), Dick’s Sporting Goods (NYSE:DKS) and Best Buy (NYSE:BBY). Not only have these three retailers grown EPS and revenue over the past five years, each was profitable in 2020. These companies have the types of businesses GameStop aspires to create if it can turn things around.

GameStop and Struggling Retail Peers

Abercrombie, Party City and Bed, Bath & Beyond have an average forward earnings multiple of 13.35, according to Finviz. Unfortunately, the problem with comparing GameStop to these other struggling peers is that GameStop isn’t expected to be profitable in fiscal 2022 or even fiscal 2023. Consensus analyst estimates are calling for an EPS loss of 74 cents from GameStop in fiscal 2022 and an EPS loss of 22 cents in fiscal 2023. GameStop’s last profitable year was 2018 when it generated EPS of 34 cents. Based on that 2018 number, GME stock is currently trading at an earnings multiple of about 674.8.

But there’s more to valuing a company than earnings alone. Abercrombie, Party City and Bed, Bath & Beyond trade at an average price-to-sales ratio of 0.55. GameStop’s PS ratio is 2.91, more than five times higher.

When it comes to free cash flow, the picture doesn’t get any prettier. Abercrombie, Party City and Bed, Bath & Beyond have an average price-to-FCF of 27.8. GameStop’s is 180.9.

What if Things Get Better?

Let’s now assume for the sake of argument that GameStop bulls are correct. The company takes a 180-degree turn and becomes profitable once again and gets back on the path of long-term growth. How does it’s current valuation compare to other profitable, growing retailers?

Williams-Sonoma, Dick’s and Best Buy have an average forward earnings multiple of 13.86. They have an average PS ratio of about 1, and a P/FCF ratio of 8.12. Remember, GameStop’s PS ratio is 2.91 and its P/FCF is 180.9.

GME Stock True Value

I’m forced to scrap earnings multiples completely since GameStop appears to be years away from profitability. But based on sales and cash flow alone, GME stock appears to be overvalued by somewhere in the neighborhood of 83% compared to other struggling retailers.

Compared to thriving retailers, the story is similar. Based on cash flow and sales, GameStop shares are overvalued by an average of about 70%.

Based on the valuation metrics above and GameStop’s current share price, a realistic valuation for GME stock appears to be somewhere in the range of $39 and $69, assuming the company can figure out how to return to profitability in the near future. I doubt that will happen, so this valuation range is likely extremely optimistic under the current circumstances.

On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.

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