GameStop (NYSE:GME) has been tumbling from its Nov. 22 peak price of $247.55 for quite a while. As of Jan. 31, GME stock closed at $108.93. This is well off of its recent trough of $93.52 on Jan. 27.
But analysts and the market may want to see more from GameStop before it goes on a major rebound. After all, the stock has been on a major downdraft since its all-time peak of $302.56 on June 9, 2021.
So, even though the stock dropped in the summer and rose again in the fall, it’s now back in the doldrums. The market seems to gyrate quite wildly, as if it is not really sure what the underlying value of GME stock really is. It may need to see more definitive results from the company before making another major rebound.
Why the Market Needs to See More
For one, the company needs to start generating positive free cash flow (FCF). For example, in the nine months ending Sept. 30, 2021, GameStop’s 10-Q shows that its cash flow from operations (CFFO) was negative $324 million.
However, after deducting an additional $40.7 million in capital expenditures, its FCF works out to a miserable loss of $364.7 million. In other words, during the last nine months, GameStop has burnt through $364.7 million. It has nothing to show for this wasteful loss.
Moreover, this negative FCF or cash burn also represents almost 10% of its revenue — more specifically, 9.7%. That is a very high percentage of revenue that is simply lost.
Moreover, in the earnings press release, the company indicated that its free cash flow for the latest quarter ending Oct. 30 was a loss of $306.2 million. That implies its annualized burn rate is more than $1.218 billion.
Where This Leaves GME Stock
The market does not like this. If this keeps up, it could use up a huge portion of the $1.4 billion in cash on its balance sheet.
The market wants to see progress so that the company’s cash resources are not drawn down. So far, it is no longer talking about store counts and stores closing. So this may be an area in which GameStop may need to refocus in order to reduce costs.
In addition, management talked about becoming a “larger” business, as if it needs to go on an expansion or acquisition binge. That simply makes no sense here.
The truth is that management needs to figure out how to cut costs and get profitable on an operating basis. In the last quarter ending Oct. 31, 2021, its GAAP operating loss was $103.7 million. Its adjusted net loss was even worse at negative $105.4 million.
Moreover, its adjusted EBITDA was negative $79.8 million. That measures earnings without certain non-cash deductions. And for the nine months, its operating loss was negative $227.7 million.
This shows that management has to get a handle on its cash burn and operating losses before the market is going to make any major moves on the upside.
What to Do With GME Stock
This does not mean GME stock won’t rise again. It could even make a turnaround. But this could be temporary if the earnings report for the quarter ending January 31 shows continuing operating losses.
The point is that GME stock is quite volatile. Nevertheless, as I pointed out in my previous article, analysts are uniformly negative on the stock. Most of them forecast a much lower price target. For example, the average price target from four analysts surveyed by TipRanks.com is $34. That represents a 69% downturn in the stock from here.
Therefore, most patient investors will wait for the upcoming earnings to come out before making any investment decision in GME stock. If the company seems to be on a track to turn its finances around, there is hope for GME stock to sustain its high present market valuation.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.
