GameStop (GME) is a struggling video game retailer that should have become irrelevant years ago. Yet the company continues to operate and improve its already impressive balance sheet. We believe that despite this attraction, the lack of a solid business plan makes it a sell.
The company sells gaming consoles, software, accessories, collectibles, and services to a mainly younger audience. It derives its revenue from the sale of new and pre-owned games, collectibles, downloadable digital products, in-game purchases, and subscriptions through the Game Informer magazine.
The target audience of the company includes individuals within the gaming community, residing mainly in the US, Canada, Australia, and Europe.
GameStop gained attention after it became a meme sensation when on the verge of bankruptcy. The resulting rally is still remembered as one of the hottest rallies in the stock market’s history. It also started the new trend of meme-trading, where retail traders would load up on options on a stock, hoping it would make a big move.
While the success of GME as a meme stock cannot be denied, the underlying business hardly has anything to impress investors. The company continues to raise money by selling stock fairly frequently to stay afloat. This, despite the fact that it has almost no long-term loan and nearly $5 billion in cash.
The company’s recent earnings report also didn’t impress many as its revenue fell over 20% YoY. While the company was able to show a small profit, we do not view it as a positive in the absence of a recovery plan. The software and collectibles segment’s growth is overshadowed by the decline in hardware and accessories sales. The company continues its recent trend of not holding an earnings call.
Rough estimates would put the company’s cash position at over $10 per share. This is by no means bad. But the underlying business continues to meander along without any solid plan for a turnaround. As long as the current management continues this trend, there is simply no justification for trading at a premium over its cash position in our opinion. We therefore have a bearish stance on the company.
GME isn’t on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 308 hedge fund portfolios held GME at the end of the second quarter which was 302 in the previous quarter. While we acknowledge the potential of GME as a leading investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as GME but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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