I’d like to say that the recent first-quarter earnings release for GameStop (NYSE:GME) justifies the huge rise in GME stock over the past six months. But the numbers released on June 9 simply don’t match up with the reality of the stock price runup.
The stock is up by $203.15 to $220.40 as of the close on June 22, or an amazing gain of 1,178% year-to-date. In fact, in the last month alone, it is up 20.2%. The problem is GameStop’s earnings were nothing spectacular.
For example, although net sales rose 25% to $1.277 billion, GameStop still lost money, including an operating loss of $40.8 million. Granted, this was better than a year earlier, when it lost $108 million. On an adjusted basis, the numbers were better, but I am somewhat dubious.
GameStop says these adjustments were for “severance, transformation and other costs.” Normally, adjustments are made strictly for non-cash expenses, especially one-time costs. There is no indication that the GameStop adjustments are completely non-cash or one-time expenses. Moreover, one-time expenses often have a habit of sticking around year after year under different categories, so I don’t like to dismiss them.
Where This Leaves GameStop
On June 22, the company announced it had completed its At-the-Market (ATM) equity offering. It now has $1.126 billion in cash as a result. The announcement was not clear if this was in addition to or included the $750 million in cash held by GameStop at the end of March. But this is not enough reason to push up GME stock so high this year.
For example, compared to its $14.8 billion market capitalization, the cash represents just 7.6% of its total value (i.e., $1.126b/$14.8b). But that does not include the existing liabilities on its balance sheet, including $664.1 million in operating lease obligations, $48.1 million in short-term debt, and $20.3 million in other debt.
This means its net cash is only $393.5 million unless the March cash is added to that balance. Nevertheless, it still doesn’t add up to much compared to the market cap, but it does give the company a longer lifeline in which it can continue to incur losses.
In that regard, the cash burn for the quarter was $33.5 million, including $18.8 million in operating cash flow losses, and $14.7 million in capex spending. At this rate, GameStop will burn through $134 million of cash annually, unless it can turn its business around.
So far GameStop is not giving out any guidance for the year. But it did indicate that May sales were up 25% year-over-year. This is good, as it shows the company might have a chance of rising above breakeven. The problem is GameStop is going to take a good while to turn around, as I described in my last article on the company.
What To Do With GME Stock
In my last article, I argued that GME stock was not worth more than $145, based on a probability matrix taking into account various scenarios. That is 34% below today’s price of $220.40 (June 22), but at the time it was just 20% below the price when I wrote about GME.
However, six analysts now have an average price target of $73.75 per share, according to TipRanks, up from $55.80 a month ago. I wrote this in my last article. This represents a potential 66.5% drop in GME stock. At the time a month ago, it represented a 71% decline. So even though analysts raised their target price, the potential drop is roughly the same.
The point is there is not much to hang your hat on with the latest earnings release. The company also announced a new CEO and CFO, both from Amazon (NASDAQ:AMZN). Maybe they can make enough changes, as I pointed out last time, to reduce the company’s lease liabilities and costs and turn it into a profitable software entertainment company.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.