Stocks to sell

GameStop Stock Looks Exceptionally Unlikely to Have a Turn-Around Here

GameStop (NYSE:GME) stock still trades at above its pre-squeeze levels, which is astounding.

Source: Shutterstock / mundissima

GME stock boasts a year-to-date price return of over 1,035%. Although it is trading considerably below its all-time highs of $483, it still trades at elevated levels. You can buy it today for a little more than $210, but I can’t see why you would.

If its transformation into an eCommerce giant in the video game industry is successful, its valuation could be justified. However, that seems highly unlikely at this stage.

In January, the stock market was buzzing over how a bunch of retail traders on Reddit bought so many shares of GameStop to create a short squeeze.

In the process, they were able to bring down a Wall Street hedge fund.

Since then, the hype has faded, though GME stock’s three-month returns are around 30%.

Through some excellent management decisions, the company has an incredible balance sheet. However, a business turnaround and transformation seem unlikely at this point.

A Look at GameStop’s Financials

Multiple share buybacks and issuance actions have substantially improved GameStop’s balance sheet.

After the second quarter this year, its equity ratio had increased by a healthy 52.2%, with $1.85 billion in equity and just $47.5 million in debt. Hence, the management created real value for the company’s stockholders and improved its financial situation.

The company’s business model and long-term operating performance are what most investors are concerned about at this stage. The company must return to profitability, but its second quarter suggests that it’s a tough road ahead.

In the first six months, GameStop’s revenues of $2.46 billion grew 25% from the prior year. However, even with 25% growth, its revenues will end up at $6.4 billion, significantly lower than its pre-pandemic sales.

The company’s net cash flows for the six months were at $1.14 billion, but if we subtract the proceeds from stock issuance, they are negative $0.53 billion.

Looking ahead, GameStop needs to create new revenue streams with higher margins to improve its bottom line performance significantly.

Since the beginning of the year, it has appointed several new executives, including a new CEO, CFO, and chief growth officer. However, there seems to be an absence of a clear strategy to steer it out of the mess it is currently in at this stage.

GameStop’s Transformation Strategy

GameStop Chairman Ryan Cohen had laid out his vision of transforming the company into an eCommerce giant. Though the odds are firmly against the company, it remains a top brand in the gaming industry with a reasonable chance to succeed.

During the pandemic, traffic to the company’s website was up a tremendous 1,000%. However, the pandemic-led tailwinds are fading away, and GameStop must have an effective business strategy to turn things around.

In the previous articles, I’ve discussed how the video game industry is going through a transition from physical releases to digital downloads. OEM’s and video game developers are offering their subscription-based services, which allow access to these games.

That means the need for GameStop services is likely to take a massive hit in the future. It needs a well-thought-out strategy to tackle this problem effectively; otherwise, it will have a tough time improving its top-line results.

Bottom Line on GME Stock

GME stock’s value has skyrocketed due to the meme stock mania earlier this year and still trades at unreasonable levels.

GameStop plans to evolve and become an eCommerce giant in the video game sector but is likely to encounter multiple problems on its journey. Hence, with its weak fundamentals and bleak outlook, it’s tough to get excited about GME stock at this stage.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.