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GameStop (NYSE: GME) is best known for its inclusion in the 2021 memes market frenzy sparked by Reddit investors. Shares of the once stagnant game retailer have skyrocketed due to the online community WallStreetBets ‘collective commitment to buy and hold stocks in order to sabotage short sellers’ positions.
There is underlying activity in the actions of GameStop and that activity is deteriorating. Over the years, the company has overlooked the rapid shift to digital game sales and its physical activity has suffered. Is it good news that management is finally investing in strategic growth initiatives?
Image source: Getty Images.
To change direction
In its taxation second quarter results publication, executives highlighted the long-term investments they plan to make: expanding its product portfolio, improving its distribution network and technology, and hiring new talent.
The surge in its stock price allowed management to raise enough cash to repay all of its long-term debt and to have $ 1.78 billion in cash. GameStop’s last sale of shares in June brought in $ 1.1 billion for the company for 5 million shares sold. And its debt level is $ 424 million lower than the same period last year.
After three years of declining revenue and consistently losing instead of profitability, GameStop needs to do a lot of rebuilding. On the surface, the new initiatives are aligned with the changing tastes of consumers, who have turned to e-commerce.
One of the ways that GameStop can differentiate itself is by having a strong title catalog so players can easily purchase multiple titles, especially when looking for used games. Instead of waiting for other players to list used games on eBay, customers could confidently go to a one-stop shop.
Investing in the fulfillment network could bring its “order to delivery” lead times to par with the market. GameStop leased a 530,000 square foot order processing facility in Reno, Nevada. This decision will improve its shipping times in the West Coast region. Amazon has conditioned consumers to expect fast and free delivery, and customers are quick to change where they buy based on speed of delivery.
In addition, GameStop is opening a customer service center and reinforcing its Florida staff to improve customer service. This is in addition to hiring people with experience in e-commerce, supply chain, user interface, user experience, and operations.
While GameStop invests in these projects, it is also closing its worst performing stores. In 2018, around 83% of video games were sold digitally, according to Statista, signaling the lack of demand for stores to stock physical inventory. The trend was exacerbated during the pandemic and in 2020 91% of the gaming industry’s revenue was digital. The company’s physical locations have shrunk 9% globally in the past 12 months, helping the company free up cash flow. Hopefully, resizing its footprint could bring the company closer to profitability.
Could this turnaround pay off for investors?
GameStop stock is trading today at $ 205, but the company has not generated positive earnings per share (EPS) for three years. In 2018, the last time earnings were positive, the company earned $ 0.34 per share. This means the stock is trading at 597 times 2018 EPS. The company’s best year over the past decade was 2016, when it earned $ 3.78 per share. The stock is trading at 54 times its best earnings of the past decade.
GameStop’s sky-high valuation is the result of investors fixing the Reddit meme on what has become a battleground between retail investors and hedge funds. WallStreetBets investors don’t care about the fundamentals of the business but focus on building a short press to deliver their feedback. Ultimately, it’s a dangerous investment for regular investors looking for long-term growth.
If you worry about ratings, you will stay away from it Stock – at least until this new strategy starts to bear fruit.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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