- GameStop (GME) produced negative earnings for the quarter and year ending Jan. 29 with huge negative free cash flow.
- But Chairman Ryan Cohen has been buying GME stock, taking his stake up to 11.9% and the market thinks something is up.
- The stock is up almost 25% on no major news except that insiders have been buying.
GameStop (NYSE:GME), the original “meme stock” is on a major run again. GME stock shot up almost 25% on Monday, March 28, on almost no news. The only real news recently is that insiders are buying the heck out of it.
For example, on March 22 and 23 Ryan Cohen, the Chairman, and the co-founder of Chewy (NYSE:CHWY), bought more shares in the company after its earnings release on March 17. He bought enough to raise his stake up to 11.9%.
At the time he bought GME stock at an average price of $101.76, spending $10.2 million, according to Barron’s magazine. Moreover, a few days later other insiders bought shares.
But no one really seems to know why.
| Ticker | Company | Current Price |
| GME | GameStop | $189.59 |
Where Things Stand With GameStop
Although revenue was slightly higher for Q4 than expected, GameStop produced larger losses and negative free cash flow (FCF). That is why what happened afterward, with GME stock skyrocketing, seems to make no sense.
For example, net income for the quarter came in at a loss of $147.5 million, compared to a positive net income of $80.5 million a year ago. More importantly, FCF came in at negative $131.6 million for the quarter. That compares to positive $137.4 million a year ago.
In fact, for the whole year to Jan. 29, GameStop lost almost $500 million for the year in terms of FCF (-$496.3 million).
All this is nothing but a miserable performance. There also does not seem to be any visible strategy on how things are going to improve. In fact, the earnings release did not talk about store closings, nor did it provide any guidance for the future.
It’s almost as if management wants the stock to wither so that they can buy more of it when it is weak.
It’s also interesting that analysts are deeply negative about the stock. In fact, Barron’s says that some analysts now believe that the stock is nothing more than a risky venture capital investment.
However, Wedbush analyst Michael Pachter told Barron’s that he expects another capital raise sometime before the end of the year. He says this will happen if the company keeps burning through more than $100 million per quarter. He thinks the company does not have more than two years of burn with its $1.2 billion in cash in the bank.
Where This Leaves GME Stock
Even though analysts are forecasting higher revenue for next year, it seems almost impossible to value GME stock. For example, the average sales forecast is $6.26 billion for the year ending January 2023, according to Refinitiv via Yahoo Finance. That compares with $6.01 billion this year.
But those same analysts still expect $5.28 per share in losses for the year. That likely leads to more FCF cash burn as well. If that means that there will be another cash raise at the end of the year, GME stock could end up trading lower.
Moreover, the average analyst price target is now $47.67, which is nowhere near its present price of $189.59.
Frankly, there simply does not seem to be any kind of margin of safety in this stock. It has a market value now of over $14.4 billion, or over 2 times sales with a loss-making and cash-burning videogame operation.
That is what value investors look for. If they can see that the stock is selling below its asset values, plus a margin of safety, then it can become a defensive investment. But there simply does not seem to be anything of the sort now at GameStop at its current price.
On the date of publication, Mark Hake did not hold (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.
