Over the last weeks, the stock of struggling gaming retailer GameStop has been making big waves for a second time after 2021. Fortunately, management made use of the mania and raised an insane ~4.3 bn. USD via two equity raises. With such a huge cash pile and no debt, GameStop is not in danger of going bankrupt anytime soon. As the stock is down again significantly, is it now worth a look?
Summary and key takeaways from today’s Weekly
– The management of GameStop made use of the recent mania and raised equity even twice.
– With a 4 bn. USD net cash war chest, an imminent dying of the struggling retailer is out of the cards.
– But what about its valuation? Is the stock worth a look? I have some doubts, despite the pullback.
I know the company since 2018 or so, because I analyzed it then. In this regard, I also found out that there are a few GameStop (ISIN: US36467W1099, Ticker: GME) stores here where I live. Otherwise, I certainly wouldn’t have noticed them, respectively not paid any attention.
If not for the pump and dump mania surrounding heavily shorted stocks like GameStop, this gaming and accessories retailer likely would be mostly unknown to many outside of the gaming world (now, it has more than 102k followers on Seeking Alpha even…).
Things have evolved differently, though.
Thanks to Keith Gill, also known as Roaring Kitty on social media, among others, the stock of GME has become a hot potato, at times ripping higher, only to crash brutally not too long after. Some certainly made massive gains on this, others ended up as bag holders as is always the case.
Nothing for weak nerves!
Self-explanatory, such moves have nothing to do with how the underlying business is doing. Earnings releases have almost become a non-event.
After ripping higher for a second and then a third time this year after the giant surge of 2021 from 4 USD to over 80 USD at the top (quickly falling back to 11 USD and then up again to slowly crumble away until this year’s spikes), management wisely conducted two big capital raises to significantly strengthen the balance sheet of this struggling retailer.
The stock has come down again massively from its recent highs and sentiment has calmed down a bit, too.
At least, I am not seeing news about GameStop every other day anymore.
With a fortress balance sheet after these events, the question arises whether the stock of GME could be worth a look now. To make it clear, not due to hoping for another unforeseen ride higher – which of course can always happen – but from a strict fundamental analysis of the underlying business.
Though the opportunity to raise equity was a gift from the outside and not thanks to great management execution (though well done), plenty of cash is there and we can have a look at the business with completely different numbers.
What’s in store for this retailer?
Let’s find out!
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Game on or stop?
For those who don’t know, GameStop is a brick and mortar retailer offering everything surrounding gaming. Besides physical copies of computer or console games (new and used, or pre-owned), GameStop is also selling more sophisticated gaming accessories like headphones or keyboards as well as merchandize and collectibles items.
However, this was never a high-margin business and the big hope – the collectibles segment – wasn’t able to turn around the whole business. Of the legacy products, pre-owned games were the highest-margin, however, this was not a growth driver but rather a cash cow.
As gaming made a big shift from buying physical to downloading from platform services like Steam (or buying used on eBay), obviously, GameStop has lost some of its business.
But first, let’s take a look at the chart of the stock in full…
…and then until the end of 2020, before the first spike of 2021 happened, to see that the business has already been in what it looked like a terminal decline, because this is important to understand.
Also notice how trading volume jacked up higher.
We can see that there were two tops, one before the Great Financial Crisis and then again around 2013 / 2014. Since then, the business literally has been melting away.
Just as a side note for later, today, the stock is trading ~60–70% above the two highs (!), depending on which day you look at it.
Looking at the development of total sales, operating income and operating margins, we can quickly verify the enduring decade-long decay.
As retail businesses have high fixed costs, a massive sales decline obviously negatively and disproportionally impacts operating margins and thus earnings.
Using the last-twelve months numbers (not in the chart), GameStop lost almost 50% of its sales since fiscal year 2015. From a high of 9.3 bn. USD, sales dropped even below 5 bn. USD with the recent numbers.
Even leaving the special environment of 2020 and 2021 aside, we clearly see that 2019 was the last year where GameStop posted an operating profit.
Besides lower sales, margins have eroded meaningfully.
Below, we can see the development of total share count (blue) and a big equity raise in FY 2022 (black). Until the first pop in early 2021, GameStop even repurchased its own stock from what it generated in (declining) free cash flow, paired with issued debt into a declining stock price.
With a dramatically lower market cap, it didn’t need much money to buy back a significant amount of stock on the open market. But GME used a lot of money!
From 2015 until 2020, share count declined by ~42%!
Especially during FYs 2020 and 2021, even pretty aggressively with –14% and –25% (green line on the second chart below) – that was before the first capital raise!
These are incredible numbers.
Interestingly, in FY 2022 (from early 2021 to 2022, i.e. during the first mania and after the buybacks), management raised a juicy 1.5 bn. USD for the lockdown-affected retailer (besides its core issues).
Now, of a sudden, in early 2021, the gambling began, sending the stock of GameStop into the stratosphere.
The stock then crumbled again, only to be lifted back up, though not as high as in 2021.
Long story short, management raised equity twice during this year’s two spikes.
First, ~0.9 bn. USD in May and then later even 2.2 bn. USD just recently in June.
Together with the cash balance as per latest numbers (Q1 2025 or early May 2024), the cash pile should be now approximately 4 bn. USD.
Share count was 306 mn. per quarter end.
Both equity raises happened after the earnings release which by the way happened rather suddenly, taking the market by surprise. Plus, the announcement in itself was one of the shortest I’ve ever seen and there was no conference call held.
Strange…
With both capital raises (0.9 bn. USD for 45 mn. shares and 2.2 bn. USD for 75 mn. shares), share count should have risen by +120 mn. to now ~425 mn. shares.
This is back to 2016 levels, however, they brought in a truly huge amount of fresh capital. But nonetheless, this is highly dilutive when share count rises by 40% in short time.
The current market cap is ~10.5 bn. USD. Subtracting ~4 bn. USD in net cash they should now have, the enterprise value is 6.5 bn. USD.
Is this low enough for an investment?
The problem is, despite the without a doubt great balance sheet now, the enterprise value is meaningfully lower only compared to the recent spikes.
The enterprise value is back to the highs of 2014 / 2015, when the business was generating almost double the sales it does today. Not to mention profitability back then vs. loss making now…
The latest numbers were pretty weak, showing another sales decline of an incredible –28% compared to last year, if you look at the screenshot from the earnings announcement above again.
Operating and net losses were lower compared to last year. However, this does not change the fact that the core business is in deep trouble.
But, nonetheless, let’s look how GME is valued compare to the past.
For this, as it is often the first metric used to value a retailer, let’s take a look at the enterprise value to sales metric (inclusive of the net cash pile and higher share count).
I don’t know about you, but for me this does not look like a low valuation, by any means!
Trading at more than 2x sales – no matter the strong balance sheet – is about four times (!) what GameStop was valued when it was crumbling from its sales and earnings highs a decade ago, but still on a profitable basis.
As the company is not profitable and burning cash, we cannot value it by earnings or cash flow metrics.
The question now remains, what will they do with their cash?
- They could buy back stock aggressively – this does not solve the core problem and only creates a short firework
- the same when thinking about a special dividend which would make even less sense
- do acquisitions – which? other retailers do not make sense. Diversifying into something completely different? Such moves often destroy shareholder value
- self-develop an online business and forge exclusive partnerships – sounds like the most logical thing to do, though, it leaves them in the role of chasing the competition. And whether any exclusive deals are doable is not sure, respectively would likely be expensive
There are a lot of uncertainties – that’s the bottom line.
It was not really helpful that the company did not hold any earnings call lately. In fact, the last earnings call was even more than a whole year ago with the full year 2023 earnings announcement in March of 2023!
We absolutely do not know what management’s plans are.
It is great to know that the CEO, Ryan Cohen, is the single biggest shareholder with ~10% of stock outstanding. He has skin in the game, that’s certainly on the positive side as his stake is worth currently 900 mn. USD.
But being honest and objective, this is completely poking around in the dark and just hoping for a happy end. While there are never any guarantees in investing, there are unknowns and risks. The more, the better to stay away.
Where I have been able to form a clearer picture and make a better assessment, is my latest investment idea for my members, where I discussed a conglomerate that’s about to break itself up into several pieces.
It owns some businesses in full, others partially through equity investments.
Taking everything together, this looks – even conservatively valued – to have a realistic upside of 50%, even 100%.
Conclusion
The management of GameStop made use of the recent mania and raised equity even twice.
With a 4 bn. USD net cash war chest, an imminent dying of the struggling retailer is out of the cards.
But what about its valuation? Is the stock worth a look? I have some doubts, despite the pullback.
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