The final day of September trading is in the books. Unfortunately, GameStop (NYSE:GME) was one of this past month’s casualties, with GME stock down nearly 20%, closing out September at $175.47, its lowest point since the third week of August.
Now, I realize September was the index’s worst month since March 2020 — S&P 500 lost 4.8% — so almost every stock struggled last month. However, the reality is that GME stock has traded in a $50 range between $150 and $200 since the beginning of July.
Until it reveals more of its e-commerce plans, I don’t think the stock will do much in either direction.
Here’s why.
GME Stock Needs a Catalyst
In my last article about GameStop in early September, I suggested investors consider buying five stocks for the price of one share of GME. That’s because these stocks generated 14x the trailing 12-month (TTM) free cash flow (FCF).
For me, FCF is one of the best ways to tell if a company is growing its business effectively. All five of the businesses on my list are doing a better job than GameStop at generating FCF.
Recently, my InvestorPlace colleague Larry Ramer stated that weakening catalysts will dampen GameStop’s share price.
While I don’t necessarily agree with his assessment of the video game market at the moment — read my Sep. 20 article about Skilz (NYSE:SKLZ) to understand why — I think he’s bang-on about the meme stock losing some of its fan base in recent weeks.
However, his point about GameStop failing to provide investors with any transparency regarding the company’s business strategy explains the lack of enthusiasm for GME stock.
Until the savior, Ryan Cohen, provides investors with a point-by-point plan of action, including e-commerce details, my colleague’s right to suggest its expensive at 3x the analyst’s average 2022 revenue estimate.
And, as I said in my article, trading at almost 200x its TTM FCF, investors know they can get more for less.
The Savior’s Old Firm Crumbles
Over the past month, Ryan Cohen’s old firm, Chewy (NYSE:CHWY), has seen its stock fall by 22%. So, this means the so-called savior of GameStop is batting two for two when it comes to September losers.
I have consistently argued that Ryan Cohen’s work at Chewy has yet to deliver profits for shareholders.
“As I said in January, former Chewy (NYSE:CHWY) co-founder Ryan Cohen still has a lot to prove when rescuing GameStop. His online pet food business is still not making money on a GAAP basis after a decade in operation,” I wrote in February.
At the beginning of September, Chewy reported Q2 2021 results. They were disappointing. While its year-over-year revenues were 27% higher at $2.16 billion, they were $40-million shy of analyst estimates. On the bottom line, it lost four cents a share, double the consensus estimate.
As for the third quarter, it expects sales of at least $2.2 billion, less than the $2.23 billion analysts are projecting.
So, even though CEO Sumit Singh is talking up the fact active customers are spending more — $404, 13.5% higher — the reality is that the pandemic provided the company with the perfect environment for making money. Yet, it generates adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins of less than 2%.
After 11 years, that’s all it has to show for its efforts. Yet, Cohen’s considered some genius.
I don’t get it.
The Bottom Line
I’ve been following retail for a long time. So if there’s one business I think I understand, retail would be it.
I could name 10 retail companies Reddit fans would profit from over the long haul with far less risk. After all, it’s not your total return that matters; it’s your risk-adjusted total return that’s meaningful.
It’s easy to see that GME stock is stuck in a rut. Until the savior delivers his plan from high, I don’t see the shares busting out of their $50 range.
It needs a catalyst in a big way.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
