Popular meme stock GameStop (GME) reported disappointing Q3 results as its ongoing slide in revenue continues, with a 20% year-over-year drop. Yet, true to form, the stock has behaved more like a high-stakes speculative gamble fueled by investor frenzy and personalities like Keith Gill, aka Roaring Kitty, instead of reflecting its foundational business health. The stock is up by 65% year-to-date, largely due to momentum gained in the spring when Gill became active on social media again and hyped the stock. Management has taken full advantage of the company’s meme-spikes, raising a hefty $4.62 billion pile of cash, though it remains to be seen how that capital will be used. While it continues to be a speculator’s delight, long-term investors might want to steer clear of the stock until there is greater clarity on the next chapter for the company.
Pick the best stocks and maximize your portfolio:
- Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
- Easily identify outperforming stocks and invest smarter with Top Smart Score Stocks
GameStop Soldiers on Despite Falling Sales
GameStop is a specialty retailer specializing in gaming and entertainment products. Its inventory consists of new and pre-owned gaming consoles, accessories, and software, including controllers and virtual reality items. The company also offers digital content ranging from in-game digital currency to full-game downloads. Recently, GameStop has ventured into the digital asset wallet and non-fungible token (NFT) marketplace.
GameStop reported a 20.4% year-over-year decline in net sales for its third quarter, posting $860 million. Hardware and accessories sales fell, making up 48.5% of total sales compared to 53.7% last year. Software sales increased to 31.6% of total sales from 29.8% during the previous year. Additionally, collectibles revenue increased to 19.9% from 16.5% last year. On the other hand, administrative costs have increased, becoming 32.8% of sales compared to 27.5% of sales last year, while the cost of sales has decreased to 70.1% of total sales, compared to 73.9% last year.
Despite the fall in overall revenue, net income has shown a significant turnaround, moving from a $3.1 million net loss in the prior year’s third quarter to a net income of $17.4 million this year. The non-GAAP earnings per share (EPS) was $0.04.
The company continues to buff its balance sheet and recently concluded an “at-the-market” equity offering program of 20.0 million shares of its common stock with gross proceeds of $400.0 million. It closed the quarter with a robust $4.616 billion in cash, cash equivalents, and marketable securities.
Hints of Metamorphosis on the Horizon
The stock is up over 90% for the past year while trading in the lower half of its 52-week price range of $9.95 – $64.83. It shows positive price momentum by trading above the 50-day (27.40) and 100-day (25.46). Its P/S ratio of 2.96x sits roughly three times that of the Consumer Discretionary sector, marking it as relatively richly valued.
The company’s filings indicate that GameStop plans to maintain lean operations and gradually invest its $4 billion cash balance in new businesses that are not necessarily related to retail gaming.
Under a new investment policy approved by the board of directors, CEO Ryan Cohen now has the authority to make equity and other financial investments on behalf of the company. This policy allows Cohen to direct investment activity in public and private markets.
Bottom Line on GME
GameStop has been marked by its fluctuating performance and speculative trading. The company has made the most of the wave, accruing significant cash reserves. The direction of these funds’ usage, however, remains uncertain. A shift in company strategy sees GameStop venturing beyond its core retail gaming business, with CEO Ryan Cohen now authorized to make equity and financial investments. Long-term investors should exercise caution until the company provides further clarity on its direction.
