Why is everyone talking about GameStop?

GameStopit is (NYSE: GME) shares jumped 15% on July 7 after its board of directors approved a 4-for-1 stock split. The split will take place after the market closes on July 21 and the shares will begin trading on a adjusted for July 22 split.

The stock split won’t change GameStop’s market value or valuation, but the decision still made it one of the hottest topics on Reddit’s WallStreetBets subreddit. But will this short-term buzz set a floor under its stock, which is still trading around 60% below its all-time high set in January 2021?

Image source: Getty Images.

Has its activity fundamentally improved?

Before GameStop’s Reddit-fueled rally last year, its days seemed numbered. Digital downloads, which generated much higher-margin revenue for video game publishers, had permanently disrupted its sales of physical games. It had also expanded its physical presence over the years with major acquisitions and new store openings.

GameStop’s main turnaround strategy was to diversify its business away from physical games by selling more hardware, collectibles, and toys. It also closed its weakest stores, renovated others and expanded its e-commerce market. Here’s how that strategy has played out over the past five years.

Metric

FISCAL YEAR 2017

FISCAL YEAR 2018

FISCAL YEAR 2019

FISCAL YEAR 2020

FISCAL YEAR 2021

Revenue increase

7.2%

(3.1%)

(22%)

(21.3%)

18.1%

Same store sales growth

5.8%

(0.3%)

(19.4%)

(9.5%)

N / A*

Number of stores

7,276

5,830

5,509

4,816

4,573

Data source: GameStop. * Did not disclose comparable store sales growth.

Last year, GameStop’s revenue rose 18% to $6.01 billion compared to an easy comparison with its pandemic-related store closures in 2020, but was still 7% lower. to its $6.47 billion in revenue in 2019. It also stopped disclosing its comparable store sales. growth last year, making it impossible to assess the performance of its remaining fleet of physical stores.

The margins tell an even darker story. Between fiscal years 2017 and 2021, GameStop’s gross margin fell from 33% to 22.4%. Its operating margin also fell from 1.5% to minus 6.1%.

Analysts expect GameStop’s revenue to grow 8% this year, but they also expect its operating and net losses to rise. However, this forecast could still be too optimistic because the video game market stalled. Spending on video games fell to its lowest levels in more than two years in the United States in May, according to the NPD Group, and the research firm expects a decline for the whole of 2022 , as supply chain issues and inflationary headwinds dampen market appetite for new releases. Games.

Red flags are easy to spot

GameStop’s business hasn’t fundamentally improved, but its stock jumped from low single digits to triple digits last year because investors realized more than 100% of its stock was sold short . This ratio indicated that many of the stocks were sold nakedor without having been properly borrowed before initiating a short position.

When retail investors realized the shorts had gotten too greedy, they teamed up on Reddit and other social media and bought the stock aggressively to trigger a huge surge. short press. GameStop capitalized on those gains by raising $1.68 billion through two new stock offerings last year.

It was a shrewd strategy for GameStop, but it should also have been a wake-up call for its investors, as it signaled that the company was eager to sell its shares at inflated prices before the inevitable end of the “stock” frenzy. same”.

More red flags appeared afterwards. In addition to obscuring the growth of its comps, GameStop has begun to shift to non-fungible cryptocurrencies and tokens (NFT). Earlier this year, it announced that it would seek crypto partnerships and create an NFT marketplace for video game publishers. Crypto and NFT markets more broadly both collapsed this year, as rising interest rates steered investors away from speculative investments, but GameStop reiterated its commitment to these two volatile markets during its latest conference call in June.

GameStop’s decision to split its stock when its price was in the $130s also appears to be a desperate attempt to jump on the stock split train. But while it made sense to Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Amazon (NASDAQ: AMZN) to split their shares because their stock price had risen by the thousands, GameStop’s split seems simply intended to generate new buzz among retail investors.

Meanwhile, GameStop’s core business is still struggling. Shortly after the stock split announcement, GameStop abruptly fired its chief financial officer, Michael Recupero, and said it would lay off an undisclosed number of employees.

Still a viable investment today

GameStop is currently trading at around 1.6 times this year’s sales. It may seem cheap at first, but other struggling brick-and-mortar retailers, like Bed bath and beyond (NASDAQ:BBBY) and Kohls (NYSE: KSS) — trade at less than one time their forward sales.

If we strip away the meme stock, crypto, NFT, and stock-splitting noise, we’ll notice that GameStop still has a lot in common with those dying retailers. Its stock might generate some short-term returns for nimble traders, but it’s clearly not a viable long-term investment. About a fifth of GameStop’s stock is still short today, but that certainly won’t replicate its dramatic gains from last year.

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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Leo Sun has positions in Alphabet (A shares) and Amazon. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares) and Amazon. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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