GameStop’s Transformation Catches Fire - InvestingChannel

GameStop’s Transformation Catches Fire

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Proprietary Data Insights

Financial Pros’ Top Former Meme Stock Searches in the Last Month

#1GMEGameStop Corp294
#2SPCEVirgin Galactic92
#3ZMZoom Video Communications42
#5AMCXAmc Networks1
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GameStop’s Transformation Catches Fire

In 2021, shares of GameStop climbed over 2,700% in a matter of weeks.

Brokers had allowed traders to short more shares than were available to trade.

So when Reddit banded together to send the stock higher, people who shorted the stock were forced to buy it back at higher prices, creating one of the biggest short-squeezes in history.

Three years later, GameStop’s stock is back where it started.

Some financial pros keep expecting this meme stock to catch a second breath of life.

We’re not so sure.

And here’s why…

GameStop’s Business

Catering to the kid in all of us, GameStop is an American retailer specializing in video games, consumer electronics, and gaming merchandise.

Sales for the company’s +3600 stores are broken down as follows:

Hardware and Accessories (50% of total revenues) – Encompasses new and pre-owned gaming consoles, controllers, headsets, virtual reality products, and other devices.

Software (35% of total revenues) – Involves sales of new and pre-owned gaming software, in-game digital currency, downloadable content, and full-game downloads for various console generations.

Collectibles (15% of total revenues) – Includes a range of products such as apparel, toys, trading cards, gadgets, and other pop culture and technology-related retail items.

While most sales come from the U.S., GameStop also has a large global presence.


Source: GameStop Q3 2023 Financial Results



Source: Stock Analysis

Despite efforts to transform the business, sales continue to decline year after year.

However, operating and profit margins, as well as the free cash flow margin, have improved.

The company embarked on a cost cutting strategy that closed 118 stores last quarter on top of the 693 shut down in the past year.

Plus, GameStop has laid off numerous employees, including senior executives.

Back of the envelope math says their plans are working. Sales per store have risen by 11.1%.

However, it’s unclear if underlying growth at the individual store levels is up, flat, or down.



Source: Seeking Alpha

GameStop expects to turn a profit next year. And this year, they generated enough operating cash to trade at 33.5x cash.

However, all the other meme stocks we identified, except Virgin Galactic (SPCE), generate positive operating cash, with Zoom Communications (ZM) and AMC (AMC) trading at much better multiples.

Unless cash flow grows, seeing any value in GameStop is tough.



Source: Seeking Alpha

We noted the revenue decline earlier. Every other former meme stock hasn’t suffered the same fate.

In fact, only AMC expects negative sales growth next year.

However, none of them demonstrate earnings growth. And GameStop trounces them on free cash flow growth.



Source: Seeking Alpha

GameStop’s margins are abysmal, save for its free cash flow.

However, you look at Zoom, Tilray (TLRY), and AMC and realize what GameStop produces is the bottom of the barrel.


Our Opinion 2/10

Transforming a dying company is tough. It’s like watching Blockbuster or Radioshack trying to survive.

Gaming is hot. But GameStop doesn’t have a competitive edge.

It may find a way to become profitable. Yet, that’s only one step to saving the business.

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