The wild ride GameStop (NYSE: GME) has been this year could come to an end. The stock is down more than 50% from levels reached just over a month ago and is down two-thirds of its value from the all-time high reached in January.
Because the video game retailer is one of the few so-called memes that still have a future, does the haircut GameStop shares received mean it’s time to buy? Not yet, and here’s why.
Go online to win
GameStop is only just beginning its recovery journey. It has a new management team and a new board of directors who share the same vision for the retailer.
They want GameStop to shed its large physical retail footprint, retaining only the most profitable, and instead shift to heavy online concentration. Or, as President Ryan Cohen called it, GameStop must become “the Amazon of the game.”
The pandemic of last year has shown that it is certainly possible. With people being forced to stay at home, with closed retail stores and e-commerce channels the only way to buy games and equipment, gamers flooded its website, sending more than 1000% visits. higher.
What he proved is that the GameStop brand still has tremendous value. Amazon.com and other retailers and manufacturers sell games, gear, and accessories, but GameStop is the go-to retailer, even online.
A war chest to support his plans
The video game store also took advantage of the investor frenzy for the title. A year ago, GameStop had adjusted losses of $ 79.1 million, had $ 417 million in debt, and nearly $ 500 million more in operating leases. Even with the $ 570 million in cash he had, it weighed heavily on his business if he hoped to survive even after the end of the video game console upgrade cycle.
However, by using the mania that surrounds its stock this year, GameStop was able to raise substantial amounts of new capital, which was used to pay off all of its debt while still leaving it with $ 771 million in cash to fund its strategy. turnaround (he still does have $ 445 million in operating lease obligations).
Meme comrade stock AMC Entertainment (NYSE: AMC) attempted to follow a similar playbook, offering an offering of 500 million shares earlier this year and, more recently, an offering of 25 million shares. Both encountered resistance from its shareholders, prompting the theater operator to suspend both plans. As a result, AMC’s financial situation is much worse than that of GameStop.
This all explains why GameStop is a memes store that may still exist for years to come, when the madness of the memes store uproar is just a distant memory. But that doesn’t make the stock a buy.
It’s time to put up or shut up
Right now GameStop is more like a penny stock with a good story. Think back to the days when everyone seemed to be a lithium miner due to the high demand for electric car batteries. Or when rare earth minerals were all the rage. The same has happened with solar panels and even gold mining.
They all had a good story to sell but nothing to back up their boast. Instead, these were classic pump-and-dump schemes, where the boosters sparked interest in the stock to jack up the price so they could bail out and reap a windfall while you end up with it. essentially worthless paper.
It can be argued that those who shout the loudest about AMC engage in much of the same activity.
Right now, GameStop’s turnaround is just talk. It remains to be shown that Cohen’s plan to turn the retailer into an ecommerce powerhouse for gamers can actually work. I think GameStop has the potential to come out of this, but not at any cost.
Put a price on a bounce
Despite all the blows its stock has taken recently, GameStop shares are still trading 4000% above the level of a year ago. The true status of the penny stocks it held at the time was arguably just as unwarranted as its current valuation, but it does not yet offer discounts to investors. In fact, everything is premium and then some.
First-quarter sales of $ 1.2 billion are 25% higher than last year, but still 18% lower than 2019. Yes, GameStop has closed many stores in the past two years, but it That’s all: he has to prove that he can further increase sales being a primarily online retailer.
These $ 445 million in operating leases tell the heavy tale of its physical footprint. Cohen is smart about wanting to get rid of this anchor, but it’s a problem to be addressed in the future.
GameStop’s valuation metrics – price versus sales, earnings estimates, free cash flow – are all significantly inflated. I can’t tell you the right buy price for the stock, but I do know that $ 165 a share is way above it.
I like GameStop’s turnaround chances, but the video game retailer isn’t a stock I’d invest in anytime soon, not even after a 50% haircut.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.