Although Gamestop (NYSE:GME) stock remains greatly overvalued, the company’s fourth-quarter results showed that it’s making progress on important fronts. I believe that, if the retailer was only several years old and had recently carried out an initial public offering (IPO), much of Wall Street would actually be quite bullish on the fundamentals behind GME stock.
Given the huge surge of Gamestop’s e-commerce revenue and its expansion into new types of products, I remain upbeat on the company’s longer-term outlook. However, I urge investors to wait for a large pullback in the name before taking a bullish position in the shares.
Here’s why.
GME Stock: Booming E-Commerce and New Products
In fiscal 2020, Gamestop’s e-commerce revenue soared 191% versus the previous year, becoming 29% of the retailer’s total sales. For most of its history, e-commerce made up less than 5% of its revenue.
Moreover, despite the easing of pandemic fears in Q4, Gamestop’s e-commerce sales still soared 175% year-over-year (YOY) during the quarter, representing 34% of its overall revenue. That’s compared to 12% in the same period a year earlier.
Gamestop’s e-commerce surge strongly indicates that the company can — and will — remain viable in the new era of retail. If GME makes the right moves, it could actually become — using its e-commerce business as a key driver — quite successful over the long-term.
However, another key driver of GameStop’s potential comeback is its expansion into new types of electronic products. Specifically, on the company’s Q4 earning conference call, CEO George Sherman said:
“We are continuing the work to expand our addressable market by growing GameStop’s product catalog. This includes growing our product offerings across PC gaming, computers, monitors, game tables, mobile gaming, and gaming TVs to name only a few.”
As I explained in my previous column on GME stock, I believe that by expanding into new electronics, this retailer could become a successful competitor to Best Buy (NYSE:BBY) and perhaps ultimately become a major U.S. electronics retailer. Right now, by meaningfully expanding its computer and TV offerings, the company certainly appears to be moving in that direction. As a result, I’m very bullish on its strategy in this area.
Increased Comparable Store Sales and Profitability
Last year, Gamestop closed a net total of 693 stores. However, in Q4, Gamestop’s sales at comparable stores climbed an impressive 6.5% YOY.
Meanwhile, the company has cut its sales, general and administrative expenses by “over $530 million over the last two years.” Plus, in fiscal 2019, its business was close to generating a profit, with the operating income coming in at negative $14 million.
So, as the pandemic eases further, I expect the sales growth of the company’s remaining stores to meaningfully accelerate. I also predict that Gamestop’s e-commerce growth will decelerate significantly, but still remain above 50%.
As a result, I think the company’s operating income will be positive this year. That strengthens the bullish case for GME stock.
The Bottom Line
Largely due to Gamestop’s struggles over the past decade, most pundits and analysts are far too bearish on this retailer’s outlook. But that’s in-line with the tendencies of many folks on the Street — many base their calls on the past rather than the future. I saw a similar phenomenon keep a lid on solar stocks and Blackberry (NYSE:BB) for many years.
As I mentioned earlier, I believe that if the company had launched a few years ago and its shares had just started trading in 2020, much of Wall Street would be salivating over GME stock. They would be lavishing praise on its booming e-commerce business, its rebounding brick-and-mortar operation and its ability to soon enter the black.
That said, though, I do believe that the shares are still overvalued at current levels. I’d wait until they drop to the $50 to $75 level before taking a bullish position in the name.
On the date of publication, Larry Ramer held a long position in BB.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
