GameStop (GME) stock price has moved sideways in the past few weeks as investors reflect on its recent earnings and cash raise. It was trading at $22.48 on Friday, much lower than the year-to-date high of $64.
GME is in a conundrum
GameStop is in a difficult place as its business continues slowing down as more customers move to video games streaming.
The most recent financial results showed that the company was not doing well, with its revenues continuing to fall.
GameStop’s net sales dropped from over $1.16 billion in the second quarter of 2023 to $798 million in the last quarter. On the positive side, its quarterly net profit jumped to over $14 million.
The challenge, however, is that analysts expect that the company’s growth will continue moving in the negative direction in the future since there is no potential catalyst.
The average estimate is that GameStop’s revenue will come in at $887 million in the third quarter, followed by $1.5 billion in the next quarter. Its Q4 revenue will be a 16% drop from what it made last year.
Analysts also expect that its annual revenues will drop by almost 23% this year to over $4 billion followed by $3.8 billion next year.
GameStop’s annual revenue has been dropping in the past few years. It stood at $6.45 billion in 2019 followed by $5 billion in 2020 and $6 billion in the following year as the meme stock hype led to higher sales. It then generated $5.2 billion in the last year.
Therefore, with GameStop, we have a company with almost 3,000 stores in the United States and thousands of employees. If the trend continues, the company will not be in existence in the next decade as customers opt for online game purchases.
GameStop has a solid balance sheet
On the positive side, GameStop is different from other troubled retailers because of its strong balance sheet.
It ended the last quarter with over $4.19 billion in cash and cash equivalents, $11 million in marketable securities, and over $560 million in inventories. Its cash hoard has grown recently after raising $400 million by diluting shareholders.
Most importantly, GameStop does not have any meaningful debt, with its total long-term debt being $12.4 million.
Therefore, the management should work to change its business. Jim Cramer has recommended that it should be a bank while other analysts believe that it should be an investment company.
On the latter, one of the potential approaches would be to simply invest the cash hoard in a low-risk index fund such as one tracking the S&P 500 or the Nasdaq 100. It would then, painfully, do away with its shrinking retail stores.
S&P 500 index has an average annual return of 10.5%, while the Nasdaq 100 index averages about 13%. Therefore, assuming that its annual return is 10%, it means that the company would make a high-margin $400 million in annual revenues a year.
The other approach is to replicate what MicroStrategy has done. With its business slowing, MicroStrategy has become the biggest holder of Bitcoin, with its holdings valued at over $16 billion and its market cap being at $35 billion.
Investing in Bitcoin makes sense because it is a rare asset that has done well over the years, which explains why Blackrock, the biggest asset manager, has started buying Bitcoin for its balance sheet.
Analysts believe that GameStop’s management will change the company into an investment holding company, which explains why its market cap of $9 billion is higher than its cash on hand.
GameStop stock analysis
On the weekly chart, we see that the GME share price has been in a tight range in the past few weeks. It has remained at the 50-week moving average. Most importantly, the stock has formed a falling wedge pattern, a popular bullish sign. Therefore, the stock will likely bounce back in the coming weeks as bulls target the next key resistance point at $30.
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