Want to invest your hard-earned cash in GameStop?
I’ve got a better idea for you. A foolproof plan to achieve better returns.
- Step 1: Place all your cash in a pile on the ground (this works best if it’s your entire life savings).
- Step 2: Pour a copious amount of accelerant on said pile (maybe even a bit on yourself while you’re at it).
- Step 3: Strike a match holding it between your thumb and index finger of your dominant hand.
- Step 4: Drop said match on the pile and enjoy the conflagration.
GameStop is a bubble ready to burst.
Let’s start with the fact that GameStop is the #1 search for institutional advisors and retail…for nearly a month now!
At ~$18.5 billion, GameStop (GME) has a larger market capitalization than these companies:
- United Airlines (UAL) – $17.9B
- Cardinal Health (CAH) – $16.8B
- Ally Financial (ALLY) – $17.1B
So if you want to hop on the gaming trend, why not go with the best…like Activision (ATVI)?
We can hear the furious typing now…
But the Fed will keep this going….
Let me ask you this.
When, in all of history, has unsustainable growth ever won out in the long-run?
IT HAS NEVER HAPPENED!
Not once has a company with shrinking revenues and zero profits managed to stay afloat.
Either someone scooped them up or the market put them out of their misery.
Because they clearly don’t see the warning signs right in front of their face.Let’s quickly go over them and why Activision (ATVI) is a better bet.
#Blockbuster
Do you know why you’ve never seen this trending?
Because Blockbuster video peaked in 2005 and died several years later…long before Twitter took off.
Netflix (NFLX) actually has a documentary coming out about ‘The Last Blockbuster’
Only a handful of our Editorial Staff could remember ever going into a Gamestop…and it was usually preceded by the phrase ‘back in the day.’
Gamestop isn’t relevant. Full stop.
They operate brick-and-mortar stores…an anchor that’s incinerated more than a few business empires already.
Go out and read any thesis on the bullish case for Gamestop. It manly relies on a transformation to digital.
Sounds amazing!
So, where’s the plan?
Ohh, that’s right, there isn’t one.
Gamestop had years to watch the world pass it by.
Other companies dove hard into the online retail space, positioning themselves for the future.
Heck, Gamestop sits in one of the few growing industries.
Instead, they sat on their fannies and watched Troy sacked around them.
Betting on them finally realizing their errors and then finding the capital to transform their business and being successful…well…it’s like asking your kids not to play in the dirty puddle. They know they shouldn’t. Yet, they’ll look right in the eyes as they do it anyhow.
Better Bets
Let’s quickly start by saying Activision (ATVI) is by no means the only play on the gaming trend, nor necessarily the one right for you.
The point here is this company directly benefits from the growth in video games.
And more importantly, does it at a profit!
Here’s a high-level overview of their financials in the last decade.
Note several key elements here:
- Growing revenues
- Improving margins
- Positive cash flow
- Growing dividends
This is a healthy company. One that trades at a price to earnings ratio of 33x compared to the S&P 500 at 27x.
A quick look at their balance sheet shows an extremely healthy amount of cash, far outweighing any debt.
With names like Call of Duty, Guitar Hero, and more, this company has room to grow. That’s not to mention they aren’t hampered by costly storefronts.
Even Electronic Arts (EA), another massive name in the gaming industry, delivers nice growth and profits for shareholders.
We happen to like ATVI over EA simply because it’s a better run company both in terms of the operating margin as well as the strength in its balance sheet. Plus, ATVI showed higher topline growth over a 5 and 10-year period.
And it was only recently that EA decided to push out a dividend to shareholders.
Will either of these names swing around hundreds of percentage points in a week?
Very unlikely.
Are these likely to exist in another 10 years?
Most definitely.
The same cannot be said for GameStop.
To be fair, GameStop outperformed both of these stocks year-to-date. And that’s fine for traders.
But unless you have a 90-day investment horizon, chances are both of these names will outperform GameStop over the next several years.
