It’s been more than a week since GameStop (NYSE:GME) reported its first-quarter 2022 results. Investors seemed to like the report. GME stock gained 10% in June 2 trading, only to give that up in the last two days.
However, before you jump on the computer or mobile phone and buy some shares of the Ryan Cohen-backed video game retailer, you might want to consider the good, the bad and the ugly of GameStop’s quarterly results. Despite the top-line growth, it wasn’t all roses. Not even close.
Baird analyst Colin Sebastian has dropped his rating and target price for the stock until management better articulates its business strategy. Until then, the analyst believes it’s impossible to value the company’s shares accurately.
Film fans may be wondering if Cohen is Clint Eastwood in this version; Is Sebastian a stand-in for Eli Wallach? Time will tell.
But for now, investors can only evaluate GameStop through its latest quarterly report, which had a little of everything in it. I’m with Sebastian. Until investors get a clear picture of GameStop’s business strategy, GME stock is uninvestable.
The Good: GME Stock Jumped on Higher Sales
There is no question that investors focused on GameStop’s Q1 2022 revenue of $1.38 billion, $40 million better than analyst expectations, and a 7.9% increase over Q1 2021.
The growth in the quarter was led by a 21.6% increase in software sales and a 25.9% jump in collectibles revenue, offset by a 4.2% decline in hardware and accessories sales, its largest chunk of business, accounting for 49% of its overall sales.
Also good is the fact that all four regions experienced year-over-year growth in the period: U.S. sales were up 3%, Canada saw a 24% increase, Australia grew 10%, while European sales jumped 34% in the quarter.
The top-line growth was decent, if not spectacular, in Q1 2022.
The Bad: Gross Profit Margins Shrinking
Cue the Ennio Morricone soundtrack: In the first quarter, GameStop’s gross profit margin was 21.7%, a 420-basis-point decline in profitability on the sale of its products. At the same time, in its efforts to become “a customer-obsessed technology company to delight gamers,” its selling, general, and administrative expenses increased 22.1% YOY to $452.2 million, or 32.8% of sales, 380 basis points higher than Q1 2021.
While some of the decrease was due to increased freight costs, which will eventually dissipate, the shift to higher-dollar lower margin categories during the quarter could be something that permanently sticks around. As a result of the lower YOY margins, it has to generate almost $75 in additional revenue to get the same $100 in gross profits.
Over the long haul, that will act as a significant headwind.
The Ugly: Losses Are Growing By the Day
At a time when most tech stocks are getting slaughtered if they don’t make money, GameStop, the wannabe-tech stock, is getting a pass from investors despite the fact it lost $157.9 million in the first quarter on an adjusted basis, more than 5x its loss a year ago.
If you annualize this loss, GameStop will lose $632 million in fiscal 2022. However, the fourth quarter is traditionally its strongest, with sales approximately 65% higher than its three other quarters in a given fiscal year. Therefore, it’s possible that GameStop could lose close to $1 billion in 2022.
While it finished the first quarter with $1.04 billion in cash, if you include its operating leases, net cash is only $418 million [$1.04 billion cash less $6.5 million for the current portion of long-term debt + $35.7 million long-term debt + $200.3 million for the current portion of operating lease liabilities + $374.5 million for operating lease liabilities].
If these losses persist, it will have to sell more equity or debt to replenish its cash position at a time when doing either is going to be a lot more difficult.
Trading at 1.64x sales, more than double its five-year average, GameStop’s lack of a visible business strategy combined with a balance sheet that’s likely to erode over the remaining three quarters of fiscal 2022, the latest 7.9% increase in YOY sales isn’t enough to justify its lofty valuation.
Watch the movie. Don’t bother with this investment. GME stock should not be on your buy list.
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.