Headquartered in Texas, GameStop (GME) sells video games, gaming platforms, accessories, and other products in retail stores and online. I am bullish on the stock.
It’s true that GameStop stock represents a stake in a video game business that’s been around for decades. However, let’s not kid ourselves. Many traders bought shares of GameStop in order to jump on the meme stock craze that grabbed headlines in early 2021.
As the meme trade faded in late 2021 and into 2022, questions arose about whether GameStop stock is reasonably priced. For instance, Wedbush analyst Michael Pachter recently declared, “Shares remain at levels that are completely disconnected from the fundamentals of the business due to ongoing support from eager retail investors.”
That’s a harsh assessment, and so is Wedbush’s 12-month price target of $30 on GameStop stock. Besides questioning the rationality of the share price, Pachter also cast doubt on a new product from GameStop that might spark the interest of cryptocurrency and non-fungible token (NFT) enthusiasts.
We’ll touch upon the crypto and NFT angle in a moment, as this product could be (no pun intended) a real game-changer. At the same time, freshly-released data should shed some light on GameStop’s financials and perhaps even convince you that there’s more to this trade than dreams of memes.
A Wallet for the 2020s
Lately, it hasn’t been easy to profit from GameStop stock. The share price reached its 52-week high of $344.66 nearly a year ago, and the stock traded in the $130s in recent days.
That’s a painful decline, though Wedbush’s $30 price target implies that GameStop stock is destined to fall much further. On the other hand, GameStop’s buzz-worthy new product may convince some investors to stay in the trade.
In a bold move, GameStop launched the GameStop Wallet, a “digital asset wallet to allow gamers and others to store, send, receive and use cryptocurrencies and non-fungible tokens… across decentralized apps without having to leave their web browsers.” It’s a self-custodial Ethereum wallet that could become the preferred storage device for modern asset holders.
Granted, there are already plenty of ways to store, send, and receive cryptocurrencies. What about NFTs, though? With GameStop Wallet, users can “easily connect to the upcoming GameStop NFT marketplace and trade NFTs from anywhere.”
The bullish argument here is that GameStop is broadening its horizons into the promising world of crypto and NFTs. Pachter, however, doesn’t seem to be particularly impressed with GameStop Wallet. “Console and mobile walled gardens are controlled by much larger technology companies that will be unwilling to let a third party such as GameStop capture a meaningful share of consumer spending on-platform,” the Wedbush analyst countered.
That may be a fair point, and it remains to be seen whether GameStop Wallet will bolster the company’s bottom line. Nevertheless, the bulls should at least appreciate GameStop’s willingness to broaden its business model.
Not Perfect, but Not Too Bad
Just minutes after GameStop released its financial results for Q1 FY2022 (which ended on April 30, 2022), its stock jumped 6%. Evidently, many investors liked the data they saw.
Perhaps this is what put them in a risk-on mood: GameStop’s net sales of $1.378 billion showed an improvement over the $1.277 billion from the prior year’s first quarter. It’s not necessarily a gigantic leap in sales growth, but it’s still a win for the bulls.
Next up, we can observe that the value of GameStop’s inventory totaled $917.6 million at the close of Q1 FY2022, which is a sizable increase over the $570.9 million recorded at the end of the first quarter of the previous year. This result, according to the company, reflects a “continued focus on improving in-stock levels in merchandise to meet increased customer demand and offset supply-chain headwinds.”
Moving on to GameStop’s balance sheet, we can also discern some improvement in this area. Specifically, GameStop increased the company’s cash and cash equivalents from $694.7 million as of May 1, 2021, to slightly more than $1 billion as of April 30, 2022.
So far, so good. Yet, in the interest of fairness, we must acknowledge one major sticking point in GameStop’s quarterly results. As it turned out, the company incurred a net loss of $157.9 during the 13 weeks ended April 30, 2022. Hopefully, GameStop will be able to narrow the profitability gap in 2022’s remaining quarters.
Wall Street’s Take
Turning to Wall Street, GME is a Moderate Sell based on one Sell rating. The average GameStop price target is $70, implying 47.6% downside potential.
The Takeaway
At least initially, investors seemed to like GameStop’s Q1 FY2022 financial results. Indeed, there were positive data points to pick out, although GameStop should focus on working towards profitability in the current and upcoming quarters.
Let’s not bury the other major news item, though. GameStop’s foray into the world of cryptocurrency and NFTs through the GameStop Wallet signifies an essential expansion of the company’s business model. Knowing this, sensible investors don’t have to rely on memes, as GameStop stock can move higher for entirely valid reasons.
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