The GameStop (GME) roller coaster sprung to life again in May, driving a 385% stock price gain in two weeks. More than two-thirds of the lift evaporated just as quickly. Even so, the surge may have prompted your inner thrill-seeker to wonder if GameStop stock is worth a look.
To answer that question, let's explore what's happening with the gaming retailer and the risks involved in becoming a GameStop shareholder.
GameStop's Market Position
GameStop sells video games and hardware on its website and through 4,413 retail stores around the world. The chain has top positioning for in-store video game purchases, beating out Walmart and Best Buy. However, an ongoing shift to online gaming and downloadable games is eroding GameStop's revenue opportunity.
To quantify that erosion, GameStop's annual sales in 2023 were $5.2 billion, 42% lower than 2011 annual sales of $9 billion. The company's annual sales in 2020, when the Covid-19 pandemic temporarily shuttered stores, was $5.0 billion—only slightly lower than last year's performance.
Historical Stock Performance
Historical stock prices have been adjusted for GME's 4:1 stock split in July 2022.
Between 2015 and 2020, GME stock slid from $11 per share to less than $1 per share. In early 2021, GameStop spiked to $80. The catalyst was meme stock investor Richard Gill, who promoted GME on YouTube and Reddit. Over the next three years, GME's price took a rocky path downward, hitting about $11 in April of this year. Meanwhile, Gill had fallen silent on social media.
On May 12, Gill resurfaced, posting an image to his X account under his handle Roaring Kitty. The image was a sketch of a man sitting in a chair, holding something that looked like a video game controller. This sudden return of Roaring Kitty sparked a new interest in GME and the stock surged in response.
More posts from Gill followed. Some included screenshots indicating he owned 5 million GME shares plus 120,000 call options. He also made a livestream appearance on YouTube, saying he believed GME CEO Ryan Cohen might be able to turn the company around.
Between early-May and mid-June, GME traded as high as $48.75 before dipping down to about $25.
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Financial Health And Performance
GameStop's most recent balance sheet dated May 4, 2024, included more than $1 billion in cash and marketable securities. The long-term debt balance was just shy of $15 million. Operating leases and other long-term debt totaled about $400 million.
After the balance sheet date, GME's leadership team took advantage of Roaring Kitty's return to sell shares and raise cash. In two equity offerings, GameStop generated proceeds of more than $3 billion. That raises GameStop's cash position to about $4 billion.
The company's income statement performance is less impressive. First quarter 2024 net sales fell 40% from the prior-year quarter. The quarterly net loss, however, improved to $32.3 million from $50.5 million.
For the fiscal year 2023, GameStop generated net sales of $5.2 billion, down 12% from $5.9 billion in the prior year. The company did deliver net income of $6.7 million, up from a net loss of $313 million in the prior year.
GameStop currently has a yield of zero. The company hasn’t paid a dividend since March 2019.
Factors Driving GameStop's Stock
For the past nine months, GameStop has shared little about the ongoing business, outside of two equity sales announcements and regular earnings releases. The company has not held an earnings conference call in more than a year.
In other words, there is no "official" news driving the stock's recent volatility. The primary reasons GME stock spiked briefly were the return of Gill and his show of support for the company and its CEO.
GameStop did host its annual shareholders' meeting on June 17. Cohen's opening remarks referenced cost reductions, a focus on profitability, a smaller network of stores and long-term shareholder value. The stock price opened the day at $28.90 and fell to $25.22 by close of trading.
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Challenges and Risks To Consider
GameStop faces two major challenges: changing consumer preferences and a questionable ability to execute.
Changing consumer preferences
GameStop's primary asset is a chain of brick-and-mortar stores that sell video games and hardware. Unfortunately, gamers are increasingly going online to buy, access and play games. This disconnect between what GameStop offers and how its customers shop has been escalating for years.
Questionable ability to execute
Between 2016 and 2019, GameStop's leadership team made various turnaround moves, which included strategic acquisitions and a plan called GameStop Reboot. None of these efforts solved GameStop's problems.
In 2021, GameStop announced the appointment of Cohen as executive chairman. Two years later, Cohen stepped in as GameStop CEO. Cohen's venture capital firm was GameStop's largest shareholder at the time. Cohen's résumé included the founding of e-commerce company Chewy in 2011.
Cohen has detailed the company's strategy. The income statement shows cost and margin improvements. And there was quick decision-making required to capitalize on the recent stock surge to raise funds. But it's unclear if GameStop is doing anything else to change its fate. With the lack of transparency plus revenues that just keep falling, it appears the company has an execution problem.
An inability to execute is a death sentence for GameStop, no matter how much cash sits on the balance sheet. Even if the company uses its newfound funding to acquire profitable businesses, running and growing those new assets cannot be done well without solid implementation skills.
Analysts Predictions
The only analyst currently covering GameStop is Michael Pachter at Wedbush. Pachter has a sell rating on GME and recently lowered his price target to $11 from $13.50.
In an interview with CNBC, Pachter famously called the 2021 GME stock rally a “pyramid scheme.” Pachter's price target was $16 at the time.
Market And Investor Sentiment
The price of GME fell after the company opened its shareholder presentation—signaling that investors were largely unimpressed.
Sentiment within the GameStop-focused subreddit r/Superstonk has been split. Some have faith GameStop will rise again, citing the company's improved balance sheet. Others point out, rightfully so, that Cohen shared no specific plans for a turnaround.
Is GameStop Stock Worth Buying Now?
GameStop is a gamble, even for the hardiest of investors. The primary issue is the lack of communication from the leadership team about the company's go-forward plan. Without those details, the stock price will continue to be driven by social media posts and meme stock investors. Those drivers are unpredictable and create more volatility than most investors are willing to accept.
Bottom Line
GameStop has a bunch of cash, no debt and a dying business model. To be fair, there may be turnaround opportunities involving acquisitions and/or organic growth initiatives. Unfortunately, silence from the leadership team about the company's future is a dealbreaker. There are too many other good companies out there to put money in a stock that requires so much blind faith.
Frequently Asked Questions (FAQs)
What caused GameStop's stock price surge in 2021?
GameStop's stock price surged in 2021 after meme stock investor Keith Gill and a Reddit forum called r/wallstreetbets rallied the public to buy the stock and force a short squeeze. Hedge funds and other investors who had bet on the gaming retailer's failure incurred losses as the stock price rose.
How has GameStop adapted to the digital gaming trend?
GameStop announced a turnaround plan in 2019 called GameStop Reboot. The plan included two priorities relative to the digital gaming trend: become the social/cultural hub for gaming and build a frictionless digital ecosystem. The company stopped reporting on its progress under the Reboot plan in 2020, though it did launch an NFT marketplace in 2022. Beyond that effort, it's unclear how GameStop has adapted to the popularity of online gaming.
What are the main risks associated with investing in GameStop?
GameStop's strategic plan and the stock's extreme volatility that's largely unrelated to business fundamentals.
How can investors stay up-to-date on GameStop's financial health?
Investors can stay updated on GameStop's financial health by following the company's financial news releases and SEC filings. Wedbush analyst Michael Pachter also covers GameStop.
Is GameStop a good long-term investment?
With falling revenues and no published turnaround plan, GameStop is not a good long-term investment currently. GME stock primarily rises and falls in response to social media activity by meme stock investors, which may continue to create short-term opportunities.
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