GameStop: Don't Let Strong Performance Distract From Reality

seekingalpha2021-06-14

Summary GameStop has been on a wild ride over the past several months as speculators have sent shares all over the place. Recent strong financial performance will likely exacerbate the situation for ...

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Comments

elonmusksexy
2021-06-14
elonmusksexy
Nice
- Zhenghao:
  Nice
Frt178954
2021-06-14
Frt178954
Nice
arijit
2021-06-14
arijit
Better stay away
Alfred1007
2021-06-14
Alfred1007
Still don't dare to buy
ZachTeo
2021-06-14
ZachTeo
To the moon
- alexteoh90:
  cool Zach
desjen
2021-06-14
desjen
Hi pls like and comment thx!
- hww1:
  ok

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As the quintessential meme stock on the market, the video game retailer has taken investors and speculators alike on a wild ride. While I have maintained that the business is destined to see its share price decline significantly absent a material amount of dilution aimed at raising additional cash for the enterprise, there is no doubt that robust financial performance from quarter to quarter can help to buoy the business by energizing speculators.\nThough no one can predict what the future holds, particularly in the short term, for a company like GameStop, there is fundamental evidence that the picture for the firm, at least for now, is improving. This improved growth can be fueled by the multi-year adoption of new video game consoles but it would be unwise to consider this a permanent fixture for the business to benefit from. Continued pain on the software side is unlikely to ease up and a move away from physical discs will hasten the company's demise absent a major change taking place operationally.\nA robust improvement on the top line\nIn the first quarter of its 2021 fiscal year, GameStop generated some exciting financial performance. Consider, for instance, its top line results. Revenue for the first quarter came out at $1.28 billion. This represents a sizable increase over the $1.02 billion the company generated in the first quarter of its 2020 fiscal year. It is always great to see improved performance, but it is important to put all of this in context. For starters, around the end of the first quarter last year, the company was experiencing store closures that impaired its ability to generate revenue. Now that the COVID-19 pandemic is winding down, this is no longer an issue and we should see some sort of rebound because of it. That said, there are other factors to take into consideration here.\nThe first relates to hardware sales the company generated. For the first quarter, revenue for hardware came out to $703.5 million. That represents an increase of 37.1% over the $513.1 million the company generated the same quarter a year earlier. Though this is positive, investors would be unwise to assume that this kind of performance is indicative of strong health for the business. Management chalked most of this increase up to new video game consoles like the PlayStation 5 by Sony(NYSE:SONY) and the Xbox Series X/S consoles by Microsoft(MSFT). Continued strength from the previously released Nintendo Switch also aided the company during the quarter.\nIt is imperative to discuss this because game consoles, particularly under the PlayStation and Xbox brand names, are not released every year. These devices take years to develop and when they are released you see a flurry of buying activity that would not be replicated in years where there is not a release. Already, the PlayStation 5 has proven a remarkable success,generating total retail sales of $3.8 billion because of 8.6 million units flying off the shelves.\nThe Xbox brand has been less successful, with total sales of just $2.04 billion caused by 5.1 million units. This is not to say that revenue for a company like GameStop won't continue on for some time. Since its inception, Sony has sold nearly 115 million of its PlayStation 4 devices. Meanwhile, the Xbox One has moved nearly 50 million units, while the newer Switch already sold 85 million. In addition, the PlayStation 4 actually saw more units sold in years three and four of its existence than it did in the first two years. So this does suggest that revenue on the hardware side could persist for some time. But it would not be wise to consider it a permanent feature to the company's value.\nOther areas where the company was strong involved the sale of collectibles. Revenue here came out to $175.4 million, up from $90.9 million seen the same time a year earlier. However, revenue on the software side truly suffered. It declined from $417 million in the first quarter of the company's 2020 fiscal year to $397.9 million in the first quarter this year. In the long run, I personally view the software side of the sales the true measure of the health of GameStop. This is especially true as more content purchased by video game enthusiasts becomes downloadable.\nSoftware sales include disc-based games, as well as e-commerce and other operations that GameStop engages in. While hardware sales will flow and ebb based on console releases, software sales determine the direction the company is heading long-term. And data there is truly discouraging. Not only did we see the year-over-year decrease in the latest quarter, we have seen software sales dropping for years. In 2020 the company generated just $1.98 billion in revenue from software. This compares to $3.01 billion seen in 2019. And it was in spite of the fact that e-commerce revenue for the business surged 190.8% for the year compared to what it was in 2019. As a note, back in 2017 the firm generated software sales of $4.36 billion.\nPart of this decline has been due to a reduction in store count for the firm. In 2019 the retailer ended the year with 5,509 stores. Today, that figure is already down to 4,698. And management is already saying they will reduce store count further. A bigger part of the issue, though, is a transition away from disc-based games and toward disc-less ones. In 2020, for instance, 40.6% of Nintendo's game sales were disc-less. This was up from just 28.6% a year earlier. Sony's Full Game Software sales went from being 43% digital in 2018 to 79% in the fourth quarter of its latest fiscal year. To make matters worse, both Sony and Microsoft have come out with disc-less options for their consoles that will only hasten the transition away from retailers like GameStop.\nTroubles remain on the bottom line\nAs revenue increased, the firm's bottom line results improved. The firm went from generating a net loss of $165.7 million in the first quarter of 2020 to generating a net loss of $66.8 million in the first quarter this year. Operating cash outflows improved from $49.3 million to $18.8 million over the same period of time. Free cash flows went from a negative $55.9 million to a negative $33.5 million. And adjusted EBITDA improved from negative $75.5 million to negative $0.7 million.\nNone of this should be surprising given the expansion in revenue the company generated. While the company did see its bottom line improve year-over-year, the continued deterioration in its software category will negatively affect margins in the long run. In 2018, the last year for which gross profit data was broken down across product lines, the sum of digital and new video game software sales generated a gross profit margin of 26.4%. This compared to a new video game hardware profit margin of just 8.5%.\nAll of this said, one really great positive for shareholders is that the company remains debt-free on a net basis. Total cash and cash equivalents on hand, including restricted cash, is $770.8 million. Meanwhile, debt is just $48.1 million. This does reduce the risk profile of the enterprise markedly.\nThis significant achievement was due, in part, to the company's ability to issue 3.5 million shares in April this year, netting the firm $551.7 million. The company is also seeking to issue another 5 million shares, which at current pricing, would bring in around $1.51 billion on a gross basis. This will go a long way to helping the enterprise boost its fundamental value, but it is hard to imagine even that justifying the $21.75 billion the company is currently worth on the market today. Seeing a firm with negative performance all across the bottom line with such a high valuation and with limited, if any, long term growth, screams overvalued.\nTakeaway\nRight now, GameStop remains one of the most fascinating case studies on the market. Rampant speculation has pushed shares up to levels that cannot be justified fundamentally. Ultimately, I suspect that shares will fall unless management issues significantly more shares in a way that boosts the amount of cash the company has on hand. The moves being made right now do help to cushion any fall the firm should eventually experience, but when that fall happens is anybody's guess.\nThough not a permanent benefit to the business today, the financial performance generated in the first quarter this year could exacerbate the volatility and keep shares irrationally high. But when you consider that the real barometer of the business's health, software sales, has such significant headwinds and continues to suffer, the ultimate destination for the business, if it maintains the current course, looks scary.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":185775338,"gmtCreate":1623676396224,"gmtModify":1704208374654,"author":{"id":"3561702664125611","authorId":"3561702664125611","name":"elonmusksexy","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3561702664125611","authorIdStr":"3561702664125611"},"htmlText":"Nice","listText":"Nice","text":"Nice","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/185775338","repostId":1127089538,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":4761650,"gmtCreate":1623724948047,"gmtModify":1663228809843,"authorId":3577189579318003,"author":{"id":3577189579318003,"idStr":"3577189579318003","authorId":3577189579318003,"name":"Zhenghao","avatar":"https://static.tigerbbs.com/9bc02f1c85fb8e61dbc393ac0ad551db","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":185775338,"type":1,"supId":0,"prevId":0,"content":"Nice","text":"Nice","html":"Nice"}],"langContent":"EN"},{"id":185574115,"gmtCreate":1623663724337,"gmtModify":1704208096594,"author":{"id":"3577175327335018","authorId":"3577175327335018","name":"Frt178954","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3577175327335018","authorIdStr":"3577175327335018"},"htmlText":"Nice&nbsp;","listText":"Nice&nbsp;","text":"Nice","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/185574115","repostId":1127089538,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":185566360,"gmtCreate":1623660774950,"gmtModify":1704208036322,"author":{"id":"3585027190392565","authorId":"3585027190392565","name":"arijit","avatar":"https://static.tigerbbs.com/61ad901d6d5ea07e5863e4477cf49f2a","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3585027190392565","authorIdStr":"3585027190392565"},"htmlText":"Better stay away","listText":"Better stay away","text":"Better stay away","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/185566360","repostId":1127089538,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":185514805,"gmtCreate":1623659826907,"gmtModify":1704208012835,"author":{"id":"3570656625926041","authorId":"3570656625926041","name":"Alfred1007","avatar":"https://static.tigerbbs.com/81d8406380cbc0525927f00a9510f2fa","vip":1,"hat":"https://static.tigerbbs.com/4c5ceab71416b120bab4604c0754b52a","crmLevel":2,"crmLevelSwitch":0,"idStr":"3570656625926041","authorIdStr":"3570656625926041"},"htmlText":"Still don't dare to buy","listText":"Still don't dare to buy","text":"Still don't dare to buy","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/185514805","repostId":1127089538,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":185593100,"gmtCreate":1623658391700,"gmtModify":1704207975415,"author":{"id":"3573958234138743","authorId":"3573958234138743","name":"ZachTeo","avatar":"https://static.tigerbbs.com/2998c8f4651bb90e2184835275b64fff","vip":1,"crmLevel":3,"crmLevelSwitch":0,"idStr":"3573958234138743","authorIdStr":"3573958234138743"},"htmlText":"To the moon","listText":"To the moon","text":"To the moon","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/185593100","repostId":1127089538,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":4749392,"gmtCreate":1623677624640,"gmtModify":1663228754929,"authorId":3555506077280254,"author":{"id":3555506077280254,"idStr":"3555506077280254","authorId":3555506077280254,"name":"alexteoh90","avatar":"https://static.tigerbbs.com/0820705d37ed3954c9e6d6db9f611e25","vip":1,"crmLevel":3,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":185593100,"type":1,"supId":0,"prevId":0,"content":"cool Zach","text":"cool Zach","html":"cool Zach"}],"langContent":"EN"},{"id":185503659,"gmtCreate":1623657960771,"gmtModify":1704207961044,"author":{"id":"3569967413953406","authorId":"3569967413953406","name":"desjen","avatar":"https://static.tigerbbs.com/4314e7f661d526ed72ecededb19043c2","vip":1,"crmLevel":5,"crmLevelSwitch":1,"idStr":"3569967413953406","authorIdStr":"3569967413953406"},"htmlText":"Hi pls like and comment thx!","listText":"Hi pls like and comment thx!","text":"Hi pls like and comment thx!","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/185503659","repostId":1127089538,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":4745046,"gmtCreate":1623658516189,"gmtModify":1663228732448,"authorId":3584434786747659,"author":{"id":3584434786747659,"idStr":"3584434786747659","authorId":3584434786747659,"name":"hww1","avatar":"https://static.tigerbbs.com/6c1c3e4564640f7232d5b95c289381b4","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":185503659,"type":1,"supId":0,"prevId":0,"content":"ok","text":"ok","html":"ok"}],"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":17,"commentSize":9,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; 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