By now everyone who keeps an eye on the stock market is familiar with the story of GameStop (NYSE:GME). To say that the company’s share price has been on a wild ride is a vast understatement. Massive volatility in recent weeks saw GME stock reach highs of $370 only to crash to $50 then rise up back again to $250. The stock is currently consolidating at around the $165 level and remains popular on Reddit.
To be honest, I have a speculative position in GME stock as I was interested in the story and overall narrative. This may be a blasphemous statement for investors that are too heavily focused on financial statements and fundamentals. However, I believe the new management of GameStop has the opportunity to create a new and innovative company. I believe there is a chance that the company continues on its run from these levels.
GameStop Has Access to Cash to Make Its Transformation
An important development for GameStop, and the fuel for its transformation, is the ability to raise cash in the capital markets. The company recently announced an At-the-market (“ATM”) equity offering program. This program would allow the company to sell up to a maximum of 3.5 million shares of stock with gross proceeds not exceeding $1 billion.
The company’s shares are trading nowhere near fair value if you are only considering the actual cash-generating assets. There is a long-term secular trend working against physical retail stores even prior to the pandemic. This trend is especially true for videogames which have seen physical sales get cannibalized year after year by not only eCommerce but digital downloads as well. There is no advantage to physical retail of videogames, unlike items like clothes and accessories which customers can physically touch and see.
The current elevated share price of GME stock is strictly a vote of confidence on the new management of the company. This confidence works in GameStop’s favor as the demand for shares still remain fairly high. The Reddit crowd has not given up, preventing the price from crashing down to earth. Because of the situation, management can use the ATM program to raise cash easily. Management can use these proceeds to rapidly accelerate its transformation from a brick-and-mortar retailer to the new GameStop. In some ways, it becomes a bit of a self-fulling prophecy.
This isn’t an entirely new situation. For example, Tesla (NASDAQ:TSLA) has for many years been considered “over-valued”. For years the company did not turn a profit and had been burning cash. However, Tesla has had a loyal following who believed in management and the company’s potential. This loyalty has been only recently rewarded with the company continuing to make breakthroughs in its technology and its business. The same outcome is possible for GameStop.
The New GameStop Will Look Nothing Like Its Current Iteration
Ryan Cohen recently became the Chairman of the Board at GameStop effectively pushing out the old guard at the company and clearing the way for transformation. Mr. Cohen’s background as the co-founder of Chewy (NYSE:CHWY) will be instrumental in helping the company with its digital transformation. The company has been building out its new executive team, including former Amazon (NASDAQ:AMZN) executives.
In its latest earnings call, the company has detailed the broad steps for its transformation. As part of its transformation, the company will continue to “right-size” its physical stores. This means further store closings of unprofitable locations.
GameStop will then pivot into a “customer-obsessed technology company”. While it’s far from guaranteed the company’s turnaround will be successful, I believe GameStop management is going in the right direction.
Investor Takeaway
For sure, GME stock is not cheap using traditional valuation metrics.
However, the company is facing a lot of macro tailwinds that it can capitalize on. Videogames continue to grow in popularity. According to the NPD Group, overall spending for videogames hit $5.6 billion in March — an increase of 18% compared to the previous year.
In other words, the market is there for video games and it is up to GameStop management to capitalize on this. The company currently has a market cap of $11.5 billion. However, it can’t be hard to imagine this GameStop ending up the size of Ryan Cohen’s other company Chewy, which has a $36 billion market cap. I am not saying that will happen tomorrow or three years from now.
The market rewards patient investors, and if you like the company, you should hold shares for the long term.
On the date of publication, Joseph Nograles held a LONG position in GME.
