Don’t ignore GameStop’s crazy review, but business is getting better


Were merchants on the WallStreetBets subreddit correct? GameStop (NYSE: GME) At long last?

It’s only because of their willingness to rally around the video game retailer against hedge funds, which are heavily shorting the stock, which has caused stocks to surge. The stock’s increased price allowed GameStop to raise hundreds of millions of dollars, albeit by diluting its shareholders, but doing so helped it improve its financial position significantly.

GameStop paid off all of its long-term debt, even reducing its short-term debt to a relatively negligible amount – just $ 48 million, the result of a French government soft loan similar to the US CARES law – and ended the first quarter with over $ 707 million in cash and cash on hold in the bank.

It now has the financial resources to achieve the dramatic business model transformation required to meet the challenges of a rapidly changing video game market, again thanks in seemingly to a group of “diamond-handed” “monkeys” hitting the wall Street with their own game.

Image source: Getty Images.

A business on the mend

GameStop looks better than it has been in a long time. In the first quarter earnings report, sales rose 25% to $ 1.3 billion.

Although the retailer is not yet making a forecast, it says the second quarter continues the momentum, with sales in May up 27% year over year.

While gross margins fell 180 basis points to 25.9% due to a stronger mix of lower margin sales, adjusted operating losses were down nearly 80% from nearly $ 100 million to $ 21 million and adjusted Net losses of $ 29.4 million or. Reduced $ 0.45 per share was cut by a similar amount of $ 157 million, or $ 2.44 per share.

Stone by stone

The video game retailer continues to recruit executives (NASDAQ: AMZN), just name a new CEO and CFO coming from the e-commerce giant. You join three other executives who jumped to GameStop from Amazon (and there are some Google alumni as well).

These additions to the C-suite should give investors hope that the retailer has a solid foundation on which to transition to a digitally driven company.

Ryan Cohen, who led GameStop’s transformation responsibility and was recently appointed chairman of the board, said he wanted the company to become a consumer-centric, online-centric retailer, essentially the “Amazon of Games”. The people he has hired over the past few months provide him with a good base to work with as they don’t have to scale a massive learning curve to achieve the goal.

Cohen himself, as a co-founder, knows something about online trading, the online pet supplies store.

The halo effect

All of the pieces look like they’re in place for a resuscitation, even if Reddit dealers had no idea how it would all turn out. Simply wanting to capitalize on the greed of hedge funds trying to drive the stock price down to zero, the business part of the bottom line was likely secondary at the time.

But the fact that GameStop had a business to build on – unlike cinema operators, for example AMC entertainmentwhich has seen a similar trend in investor sentiment but has much shakier foundations – could have been a motivating factor in choosing it as a rally point.

Still, the saga has already had at least one positive outcome as it introduced teenagers to the concept of investing that many had not thought of before the whole meme stock-trading frenzy erupted. When Fidelity Investments opens teen-oriented brokerage accounts, GameStop may be able to lure them to its inventory and stores both online and offline.

The wildcard is how much investors (not traders, since they seem willing to bid the stock on the moon) are willing to pay.

Even after recently plummeting 27% due to a variety of concerns like an SEC investigation into trading activity and a new stock sale plan, GameStop’s price is still over $ 220 per share. It trades three times its sales, 33 times its book value, and 255% of the free cash flow it generated last year.

There is still a lot more air underneath to fall into than headroom to step on.

Can the goal really be achieved?

And GameStop’s business is by no means out of the woods. It is still loaded with an extensive portfolio of 4,700 brick-and-mortar stores and has yet to prove the thesis of its transformation: Can it actually become the “Amazon des Gaming”?

Cohen says he’s not yet ready to reveal GameStop’s strategy for success, but the company certainly looks better positioned than it has been before. The company appears to have learned a lot about the digital arena during the pandemic, and its finances are arguably in the best shape they have been in a while.

If it weren’t for the ridiculous current valuation of the video game retailer’s stock, GameStop could even be a buy recommendation.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.


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