đź•ą GameStop: the Quiet after the Stock Storm

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It’s been almost a year since the Gamestop stock case. For those who wonder what it is, in January 2020, Reddit Community WallStreetBets orchestrated a significant cumulative buy of GameStop stocks.

The volume of stocks increased tenfold, the price adjusted, growing 1822% (taking as reference the interval 7th — 27th of January). How is GameStop after that? Was it a market joke? What is the actual value of Gamestop stock? As we said, company financial statement are less and less related to stock performance, let’s try to figure out if that’s another case.

Company Analysis

Before starting, let’s give a bit of context. Gamestop is a retailer of videogames, consumer electronics and gaming merchandise. The Texan firm also runs additional activities such as Game Informer, trade-ins, GameStop TV, pre-order bonuses and GameTrust.

It is one of the largest video game retailers globally: 4816 stores (3192 in the US)., it operates in Canada, Australia, New Zealand, Austria, France, Germany, Ireland, Italy, Switzerland.

GameStop was founded in Grapevine (TX) in 1984. Currently, it counts 12.000 employees working full time and 17.000–23.000 employees working part-time. It is presently listed 521st on Fortune 500.

It shows a significant dependency on vendors: 68% of its supply comes from 5 different players, and in the last years, its software revenues drastically dropped.

Financial Analysis

The situation does not seem bright but still encouraging if you look at the financial and income statements. The company is currently unprofitable, and its stock prices had intense volatility during the beginning of 2021. In the last 5 years, the company has lost 44% of its earnings every year (averagely). In the previous year, the company has grown revenues by 80% (against 156% of the industry and 38% of the market), mainly due to reducing General Expenses & Administration costs by 130m.

The financial situation is excellent: short term assets cover both short term and long term liabilities, debt to equity ratio is 2.6%,

Some financial highlights:

  • +25.6% Sales Q2 2021 vs Sales Q2 2020
  • 15.38b Market cap
  • x8.2 Price to Book Ratio
  • 39% Volatility of the stocks in 2020
  • 1.3 years the average tenure of management: it is considered inexperienced.

Market Analysis

For sure, it is hard to find a real competitor: no retailer focus so much on video games. In the last year, it continued to transform the physical store presence through ongoing market optimization and global de-densification efforts. As a consequence, it is not easy to define who are competitors (retail? videogame? electronic) or the market size, but let’s try to do so anyway

  • 26B$ Market estimate in North America for content in digital format
  • 18B$ Market estimate for new physical console video games products in the country in which GS operates
  • 792B$ World Consumer Electronics Market
  • 157B$ Global Market for Videogames

The business present also a strong seasonality: Q4 represented for 2019 and 2020 respectively 42% and 34% of the sales.

History

The company’s story starts in 1984 when James McCurry and Gary M. Kusin found Babbage’s, but only in 1986 did they start focusing on video games, specifically Nintendo and Atari 2600. In 1988 First IPO occurred, and in 1991 Video games were two-thirds of Babbage’s sales.

Then occurred a phase of mergers and divisions: in 1994, Babbage joined with Software Etc. to form NeoStar, then in 1996, Leonardo Riggio purchased NeoStare, and dissolved the company. Babbage’s Etc saw the light.

GameStop brand launched in 1999, and the expansion continued: In 2002, a second IPO occurred, while in 2005, EB Games became part of the group to expand in Europe and Oceania.

In recent years, you can notice a descending trend: from 2012 to 2016, the management launched Movie Stop with a poor result, in 2017 the scandal related to Circle of Life and other poor working conditions came to surface: Circle of Life was a metric that GameStop uses to measure the performance of their employees, and according to Kotaku were fired if the score did not match management aspirations.

Eventually, in 2019 the public opinion was pissed again for the planning of restructuring and layoffs, and last year Covidput Gamestop and all the other retailers in trouble.

2021: Stocks and Trends

The current year started with a boom: short squeeze resulted in 1822% increase of GameStop stock price because of r/wallstreetbets, causing many departures in the top management.

Surprisingly, after almost ten months, stock prices are still at around 200$, from the peak of 329$ registered on January 27th, still ten times more than 2020. Is it GameStop stock real potential? Or is the whole stock market not a reflection of company’s’ annual reports but just a feeling coming from the investors’ gut? For now, the management is well aware that the financial capital is not “granted”, and they are not putting in place risky strategies.

Also, do not forget the Blockbuster case: will Gamestop manage to go online fast enough? How will it fight online video games stores (Microsoft, Nintendo, Sony…), going more digital than ever? Covid is definitely helping in that sense, forcing the company to focus on e-commerce: in 2020, pandemic management cost 25 million $, and who knows what’s next.

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