Is GME for Me?

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Access to quality information has leveled the playing field between retail traders and institutional investors. 

For example, short-interest data was once sought out by the pros but is now available to all retail traders.

But why would such a specific area interest regular traders?

Let’s take a step back to January 2021, when short sellers in GameStop (GME) got squeezed out, some taken out of business, as shares rose more than 1,745% in one month!

Although shares have since fallen from those epic highs, we’ve seen a resurgence in interest amongst financial pros and retail traders.

In fact, GameStop moved from outside the top 50 stock searches last month to making the top 20. 

Part of that is a resurgence in meme stocks.

A lot has changed since the tiny game store first rose to prominence. It’s moved onto cryptocurrencies and so much more.

But does that make it any more investable?

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GameStop’s Business

GameStop (GME) is a gaming, pc, electronics, and collectibles retailer. The company sells new and pre-owned products through its physical stores and online. 

At the start of the year, GME had over 4,500 physical stores. And while that’s an impressive number, the company is trying to pivot more into e-commerce, blockchain gaming, and even the metaverse. 

GME launched its NFT Marketplace in July 2022. And during its first week, it did more sales volume than crypto powerhouse broker, Coinbase (COIN). 

This is all part of the plan set by Chairman, and Chewy founder, Ryan Cohen. His initial investment of $76 million in GME was valued at over $1 billion at one point during the stock’s highs. 

Nonetheless, Cohen continues to play an enormous influence.  The company has made more than 600 corporate hires since 2021. 

During Q1 2022, the firm made over $1.3 billion in sales, an improvement from the prior year’s first quarter of $1.27 billion. 

Despite garnering massive media attention over the last two years, GME has been relatively quiet. Unlike some firms who constantly issue press releases to keep investors and Wall Street interested, GME’s popularity has been organic—thanks to Reddit, Robinhood, YouTube, and internet blogs. 

Even more impressive, the firm has been able to hold onto most of its gains and even outperform the broader indices in 2022. 

Financials

For the last 18 months, the firm has invested in personnel, technology, and infrastructure—intending to be profitable soon. To speed up the process, the company announced some cost-cutting initiatives, which included laying off staff. 

Despite revenues being smaller in 2017 than they are in 2022, GME trades 5x higher than it was in 2017. And that’s the story here with GME. 

The company’s fundamentals have been declining for years. However, it’s a wildly popular company among retail traders and a leader in the newly created meme stock category. 

For example, non-profitable companies have gotten slaughtered in 2022. However, GME has been relatively flat year-to-date. 

Despite it bleeding money. The firm has a negative profit margin, negative operating margin, EBITDA, and net income. 

GME has total debt of $617 million and total cash of $1.03 billion, at a market cap north of $10.8 billion.

The firm has a current ratio of 2.07x, implying that its current assets are enough to cover its current liabilities. 

Valuation

GME has negative earnings per share and no P/E ratio. 

In fact, the company has yet to deliver positive cash flows this year, burning through a whopping $303 million last quarter.

Even the price-to-sales ratio at 1.76x is nearly double the sector median.

Growth

Despite being in a transition, GME was able to experience double-digit revenue growth (YoY). A significant improvement when you consider its five-year average has been -7.66%

The company attributes its recent sales bust to new and expanded brand relationships. 

GME operates at a gross profit margin of 21.5%. However, we should expect that figure to improve as it moves into more digital assets and sales. 

Of course, it has yet to reach profitability, but it continues to make moves it believes will get there. 

Opinion 5/10

GME is in a transition phase. And the company’s stock is enjoying a nice premium, thanks to investors’ belief in Ryan Cohen and his ability to execute.  

It is the number one stock in the meme stock category. And even though it’s been a brutal year for most stocks, it hasn’t bothered GME that much. 

However, we don’t know that much about the company’s future. And although the firm could very well execute and turn it around, it sounds too risky at its current valuation.