After Gamestop’s 368% rally, is it as good as it gets?

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GameStop (NYSE: GME) came back in force after his dismal fourth quarter earnings report at the end of March, the stock hit a low of $ 2.57 per share. It turns out the pandemic has been a saving grace for the video game retailer.

With everyone locked up at home doing nothing, playing video games was a key form of entertainment, and GameStop’s e-commerce platform has shown that it may be able to survive in a digital gaming world. and online.

Image source: Getty Images.

And the retailer took advantage of the mania of the looming game console upgrade cycle, as both Microsoft and Sony Get ready to launch the latest versions for Xbox and PlayStation, respectively.

Still, with a stock that has more than quadrupled in value since it bottomed out earlier this year, investors must be wondering if it’s as good as it gets. I think they should be careful here.

A growth spurt

I already said that the console upgrade cycle is a very short-term cash infusion for the company, and it will need to develop a plan to survive in a future where the physical games and physical store market is simply no longer relevant.

The lifecycle of consoles is increasing, which means GameStop is unlikely to survive if all it does is hope to use current upgrades until the next cycle is bubbling up. With new systems for seven years or more on average, GameStop has to do something now if it wants to be there then.

To some extent, it is – the pandemic has shown the retailer how to leverage their online presence and physical footprint to increase revenue. E-commerce sales jumped 800% in the second quarter after increasing 1,000% in a six-week period in the first quarter.

GameStop has hired a new chief digital officer to focus on how it takes on the challenge. He’s also redesigned his mobile app, which he says will make a player’s experience more meaningful, whether in the store or away.

Management noted that e-commerce sales are on track to reach $ 1 billion this year, but have only reached 20% penetration, suggesting that there remains significant growth in the sectors. years to come. Coupled with arguably one of GameStop’s most important developments, the just announced 10 year agreement with Microsoft To modernize the retailer’s back-end operations and expand its digital and physical gaming options, there is hope for the future of the business.

Departure on a tangent

Yet it also highlights the massive impact that GameStop’s physical store footprint will continue to have on its finances.

While new activist investor, Chewy.com founder Ryan Cohen, wants to use these assets to the advantage of GameStop, he will also radically remake the company. The project to transform the video game distributor into a rival of Amazon by dramatically expanding the types of merchandise it sells, it’s reminiscent of the resources that GameStop wasted on acquiring Simply Mac and Spring Mobile.

Company must avoid the fate of video rental giant Blockbuster, which failed to rise to the challenge Netflix posed, but this aggressive strategy promises to derail the more strategic change CEO George Sherman is trying to engineer.

Become big as he gets small

Expand the range of merchandise beyond video games and its Funko collectibles and being able to ship them to customers faster is a seismic change in logistics that many companies with deeper pockets and more experience have tried and failed.

GameStop will struggle to compete with Amazon in any area, be it selection, price, or speed of delivery. The ecommerce giant has vast financial resources it can tap into to support its operations, while GameStop relies on the one-time event in the game console’s upgrade cycle to keep it from falling into the lurch. ‘abyss.

While the video game retailer’s physical footprint gives it a geographic advantage, its stores also tend to be located in malls and malls, which suffer from lower consumer traffic.

Revenue generation capabilities beyond new console sales appear uncertain, but GameStop has $ 472 million in debt on its balance sheet, offset by $ 735 million in cash and cash equivalents.

GameStop generated $ 182 million in free cash flow in its most recent quarter, even though it recorded negative adjusted earnings before interest, taxes, depreciation, and amortization, so it’s not going to go bankrupt anytime soon, but its capacity to finance this new transformation seems limited.

Good as long as it lasted

Even with the gains made in online sales, overall revenue has still fallen significantly in previous quarters and GameStop is trying to become profitable as a small business. At the same time, it can drastically change the business forcing it to grow.

There are a lot of things that can go wrong with GameStop after its big rally, and it has to perform flawlessly to be successful. This suggests the video game retailer has reached its peak – and investors are probably better off.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging 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.


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