The markets have stocks that are bought purely from the perspective of long-term investing. Further, there are quality high-beta growth stocks that can create massive wealth for an investor and deliver quick returns for a trader. GameStop (NYSE:GME) however falls in the third, and most dangerous category of stocks that are purely for speculation. I say dangerous as these stocks have high volatility and can quickly erode a significant part of the capital.
Mid-May, GameStop stock touched closing highs of $48.75. Within ten days, GME stock was back to $18.3. There was another sharp rally and the stock touched $46.6 by the first week of June. Currently, GME stock trades at $21.
This kind of stock move is not backed by fundamentals. It’s purely speculative. While some investors make quick money, others lose a significant part of the capital at the blink of an eye. It’s difficult for me to predict if GameStop stock will surge again. However, from a fundamental perspective, it’s an easy call to avoid GameStop stock.
Disappointing Sales Performance
When it comes to fundamentals, there is nothing positive to talk about. For 2023, GameStop reported revenue de-growth of 11% on a year-on-year basis to $5.3 billion. It’s worth adding here that the company started the financial year with a store count of 4,413 and ended with 4,169 stores.
For Q1 2024, revenue decline has accelerated with GameStop reporting top-line of $881.8 million. This was lower by 29% on a year-on-year basis. It’s clear that GameStop is struggling with a decline in sales from the hardware, software, and collectible segment. Further, there is nothing positive on the horizon that’s likely to translate into revenue growth.
The company’s “business priorities” listed in the annual report are generic. As an example, the company intends to “establish omnichannel retail excellence.” The key questions are how and when. With a decline in the number of stores, macroeconomic headwinds, and sales de-growth across segments, I don’t see a turnaround anytime soon.
Margin Pressure and Cash Burn
The second big negative is that revenue de-growth has not been associated with a decline in losses. For Q1 2024, GameStop reported an operating loss of $50.6 million as compared to a loss of $58.4 million. in Q1 2023. While operating losses had narrowed in FY2023 as compared to FY2022, the first quarter numbers are discouraging.
Further, loss from operating activities was $110 million for Q1 2024. This would imply an annual loss from operations of $450 million. GameStop ended Q1 with a cash buffer of $1.1 billion. However, given the losses, I would not be surprised if the company pursues equity dilution.
Overall, I expect credit metrics to worsen for GameStop in the next 12 to 24 months. I also see merchandise inventory level at $675.8 million as a potential credit risk. With the company commanding a market valuation of $8.9 billion, it’s clear that GameStop stock is overvalued even after the recent correction.
Bottom Line: Stay Away From GameStop Stock
From the above discussion, it’s clear that there are no positive catalysts for the stock from a fundamental perspective. Revenue is on a decline and cash burn has negatively impacted fundamentals. Furthermore, GameStop has no clear strategy for arresting the revenue decline or working towards a significant improvement in margin.
Therefore, the stock movement is purely speculative. There is bad news there too. The yen crisis has translated into a meltdown for the broader markets. There can be a 5% to 10% correction in the index in the coming months. Speculative activity declines when the markets trend lower. I therefore expect GameStop stock to witness further correction. For now, even speculators should stay away from GME stock to avoid capital erosion.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Faisal Humayun 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.
