Is Now the Time to Play GameStop Stock?

A deeper look at GameStop’s revenue and business model

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GameStop Corp. (NYSE:GME) is a video game and gaming merchandise retailer. The company had been the biggest player in the gaming market for decades, but is now fighting the possibility of bankruptcy. Much like Blockbuster did in its time, GameStop faces an uphill battle against digital distribution. Although the new releases of consoles from Sony and Microsoft may bolster sales in the short term, the fact is that gaming consoles and accessories will not be enough for the company to stay afloat. Further, both Sony and Microsoft are releasing versions of their consoles without a disc drive, putting another nail in the coffin for gaming retailers. Video game downloads are increasing rapidly and are expected to continue to do so long term. This begs the question: why is GME stock up nearly 250% from its 52-week low?

Let's first take a look at earnings expectations and reports. GameStop has missed expectations on three out of the last four earnings reports. Most recently, GameStop missed earnings by 27 cents, reporting a loss of $1.40 instead of the $1.13 loss that was anticipated. Further, GameStop reported negative earnings in three out of the last four quarters.  The last time that GameStop reported a profit was after the first quarter of 2020, when they significantly beat expectations by a margin of cents.

GameStop’s revenue, as well as their net income, has been steadily declining year after year. The only profitable time for the company appears to be during the holidays. The company's TTM (trailing twelve month) EPS is at -4.90, and GameStop has no forward price/earnings ratio.

The company currently stands with a market cap of $591.896 million. There is $1.17 billion in debt on the balance sheet, nearly double the company's market cap. Total liabilities currently stand at $2.023 billion. GameStop now holds $735.1 million in cash according to its balance sheet, and an addition $2.375 in total assets. GameStop's total equity is $352.3 million today.

    As the company continues to dig for a new business model, the exciting news has broken that GameStop will be attempting to compete with, Inc (NASDAQ:AMZN). Like Wall Street has a tendency of doing, investors reacted in an exaggerated manner. Although very little details have been provided to date, on September 22 the stock shot up just over 20%. In just the past month, GME stop has shot up nearly 100% due to excitement over the new-gen consoles and, frankly, pure speculation.

    The grim reality is that competing with Amazon is a lot easier said than done, as all too many retailers have experienced. Despite GameStop cutting down on expenses recently, the company just doesn’t have the financial backing to compete with a company the size of Amazon. To further add to the conflict, the very same consoles that will boost GameStop’s sales revenue in the short-term will also be a huge necessity in the shift to digital distribution.

    Despite GameStop’s recent stock growth, there are a lot of signs pointing toward pessimism on GME. Executives have recently made the decision to close underperforming stores as a way to continue to lower expenses, but there has yet to be any measurable change to the company’s business model. Cutting expenses looks great on a balance sheet, but GameStop must focus on increasing revenues if the company plans to survive and thrive. Overall, the amount of risk involved with GameStop as a long-term investment outweighs what GME stock currently has to offer to investors.


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