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Gamestop: The New Game Requires Patience to Play

Gamestop (NYSE:GME) rode to glory over the last year as a “meme stock.” The name was pushed by investors at Reddit’s wallstreetbets forum as a bet against short sellers.

GameStop Stock: Is The Tide Turning For GME Stock?
Source: Shutterstock

The winner was Ryan Cohen. He co-founded Chewy (NASDAQ:CHWY), selling it to Petsmart for $3.35 billion in 2017. Petsmart led Chewy to glory. Its market cap is now $37 billion, and it had 2020 sales of over $7 billion. Chewy trucks, and gig delivery people, are now a regular feature in upper-income neighborhoods.

GME stock, meanwhile, went from below $10 to a high of nearly $350/share during its meme heyday, as Cohen used the public’s money to take over the company. It was still at over $300 in June when he announced his “big plans.” It has since lost half its value, opening August 9 at about $152/share.

The New Game

The meme small investors bought was that Cohen would transform Gamestop from a chain of retail stores into an online powerhouse. Like Amazon.Com (NASDAQ:AMZN).

The strategy Cohen revealed in June was like Amazon, but Amazon the store, not Amazon the cloud. Gamestop has begun buying Amazon-sized fulfillment warehouses. Cohen named Matt Furlong, with nine years’ experience in Amazon fulfillment, as CEO. Gamestop also sold more stock, a lot more stock. After its most recent sale, it may have $1.7 billion in cash.

The new Gamestop is due to report second quarter numbers on September 8. A loss of about $30 million or 41 cents/share is expected on revenue of $1.07 billion.  That’s below the first quarter’s $1.257 billion in revenue, which also saw a loss of $67 million, $1.01/share.

Why They Stay

Hedge funds that followed the small fry into Gamestop, like Senvest Management, rode it to glory. Investors who saw a profit-less company making bank on investor gullibility promised never to cover it again.  The odds of success are too long, the action has nothing to do with fundamentals, so Bank of America (NYSE:BAC) has thrown in its green visor. 

Meanwhile, the stores remain a shambles, with workers on minimum wage seeing hours cut. Cohen has closed over one-quarter of them, leaving about 4,600 worldwide.

Cohen talks about making GME stock the “Chewy of gaming,” with the stores acting as its Petsmart. Petsmart sold out of Chewy late last year. 

But what does being the “Amazon of gaming” even mean? More online sales, sure. But the whole gaming industry is moving online, not just its front-end. Microsoft (NASDAQ:MSFT) is swallowing its buyers’ action by combining cloud gaming services with its Xbox. Amazon has Twitch, which lets gamers watch gamers. Even Five Below (NASDAQ:FIVE) seems to have a more compelling gaming strategy through esports and, as I’ve written, happier shareholders.

What you’re left with is stock that’s in a trading range. The traders who bet on Gamestop as a meme are hanging in, even if that makes no sense to people like our Wayne Duggan.

The Bottom Line

Cohen is, like those small investors, still heavily invested in Gamestop. In June he reported holding 13% of it, a stake now worth nearly $1.5 billion. 

Cohen’s fortune comes from Gamestop, not Chewy. Since June he’s gone quiet, claiming that’s how he succeeded in dog food.

Betting on Gamestop today means betting on Cohen and Furlong for the long run. Will they make the stores a safe space for gamers again? Can they find an online niche in a world dominated by the Cloud Czars?

If you own Gamestop, stay tuned. If you got in at the height of the craze, you may feel you have no choice. It may take years to turn a profit, even if Cohen’s strategy works out.

On the date of publication, Dana Blankenhorn held long positions in AMZN, MSFT and BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.


Article printed from InvestorPlace Media, https://investorplace.com/2021/08/gme-stock-the-new-game-requires-patience-to-play/.

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