GameStop Stock: The Underlying Business Is Doomed For Failure

Popular meme stock GameStop (NYSE:GME) enjoyed one of the most momentous rallies in recent memory. GME stock closed at $17.25 on the first trading day in January this year and reached a high of $483 at the end of the month. Fortunes were made and lost in a very short span of time. However, the stock has flat-lined ever since the short squeeze, which now has investors considering what the underlying business is worth.

Photo of the Gamestop (GME) logo On a Mobile Phone.

Source: Shutterstock / mundissima

Unfortunately for GME’s stockholders, the business has been struggling for a while now. Revenue growth before the pandemic was choppy. Total sales dropped 19.4% in 2019. Moreover, operating income dropped over 130% in 2019 from the prior year.

Though GameStop is looking to go on the offensive in reversing its fortunes, it will take a while before it can make an impression with its fundamentals.

Revenue Growth Has Been An Issue

GameStop’s sales growth was lackluster well before the pandemic engulfed the world. The troubling losses on its bottom-line are due to its inability to grow its revenues at a strong pace for a sustained period. GameStop’s sales have dropped at an annualized rate of 6% in the past decade.

The key issue with GameStop is it is losing its popularity with gamers, as it specializes in selling physical copies of games versus digital copies. Industry experts are of the view that within the next six years, digital sales might entirely dominate the sector. You also have the top video game consoles, such as the Sony PlayStation 5, with a digital-only model. Therefore, the proliferation of digital game sales will be a major problem for GameStop to revitalize its business.

Nevertheless, GameStop is looking to go full steam ahead with its online plans to mount a comeback. It recently raised $1.1 billion by selling its stock and used some of it to pay off its long-term debt. Moreover, as of the second quarter, it had $1.78 billion in cash equivalents, giving its management ammunition to invest in new initiatives.

GameStop plans to open up a new fulfillment center in Nevada to support online sales. Additionally, it is looking to expand its product catalog to attract more customers. Time will tell how these initiatives will pan out in the upcoming quarters.

The Stock Is Overvalued

price to sales gme stock to peers

Source: Muslim Farooque

EPS GME stock to peers

Source: Muslim Farooque

 I guess it’s a no-brainer to assume that GME stock would be overvalued. Though it has lost a fair share of its value since the height of the retail trading frenzy, it is still trading at highly unreasonable levels.

From the charts above, we can see that compared to some of the biggest names in retail and gaming, the company falls flat in profitability. However, its price-to-sales ratio is higher than Walmart (NYSE:WMT) and BestBuy (NYSE:BBY), which have outperformed the company in the top and bottom-line performance.

GME stock is currently in nosebleed territory versus profitable retailers performing exceedingly well. Moreover, GME stock is extremely expensive across all other price metrics. For instance, it is trading at roughly seven times its book value, over 140% of the sector average.

Bottom Line On GME Stock

GME stock has been a phenomenon and arguably the most covered stock this year. However, as meme stock has faded away, investors need to get down to brass tacks. GameStop’s business has been in disarray for a long time and the rise of digital downloads will further dent its comeback prospects. Hence, GME stock is a worthless investment at current price levels.

On the date of publication, Muslim Farooque 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 Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.  

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