It seems like people just can’t get enough comeback stories lately, whether it’s Apple TV+ hit Ted Lasso or my favorite investment turnaround story right now: GameStop (NYSE:GME).
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GameStop holds the esteemed title of favorite turnaround play despite the fact that I’ve gotten this stock completely wrong. I’ll admit — I never thought GME was worth anything close to $400, $300 or even $100.
But if there’s one thing I’ve learned from Ted Lasso, it’s to never judge a book by it’s cover. Lasso, the titular football (American) coach adeptly played by Jason Sudeikis, is hired by AFC Richmond, a struggling London football (soccer) team competing in the U.K.’s Premier League. Under Ted’s leadership, the team goes on to surprise everyone — just like GameStop, the struggling mall retailer turned overnight sensation.
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If you haven’t already heard enough about GameStop, the SEC’s got you covered. Hot off the press: a 45-page report examining how the shares rocketed about 2,700% over several weeks by a Reddit-fueled rally.
Save yourself a few hours. Don’t read the report (watch Lasso instead). You don’t need the SEC’s analysis to recognize that GameStop is much more than a simple short squeeze. Today GME trades 10x higher than it did pre-juicing. Short interest is down to 17% of float — still high, but well below peak levels over 40% back in January of this year.
With a new management team and a strong balance sheet, GameStop is becoming a legitimate turnaround stock to buy now. As the lovable Ted Lasso reminds us, “Be curious. Not judgmental.” That isn’t to say a turnaround is assured. Far from it. But with the stock trading at a more reasonable valuation, you don’t have to be a believer to believe in the near-term payoff in GME stock. Here’s a closer look.
GME Stock: Version 2.0
GameStop was part of the 2021 meme stock wave, greatest hits including: movie theater chain AMC Entertainment (NYSE:AMC), electronics company Koss (NASDAQ:KOSS) and clothing chain Express (NASDAQ:EXPR). All of these stocks clocked astronomical gains as online hype reached a crescendo.
The meme bubble is now largely behind us, but little has changed for GameStop, at least on the surface. The stock has plenty of haters, core business remains under siege, bears say GameStop has no future and the stock is going to zero.
But much like a mediocre team that goes on to win a championship, today’s GameStop is a world apart from where it was a year ago. The company has closed and consolidated stores and amped up its digital fulfillment capabilities. Most importantly, GameStop has massively improved its balance sheet. When a company has more than a billion dollars of net cash, the chances of the stock going to zero are pretty slim.
With some incremental improvements in place, what seems more likely is that GameStop has stopped sinking. That means the stock could start showing the early shoots of a recovery. With new management and a bolstered balance sheet, does GameStop have what it takes to compete in a digitally-dominated gaming world? The answer may matter less than you think.
Ready to Compete in a Digital World
The first thing any investor wants to see as evidence of a turnaround is top line stabilization. And GameStop delivers, with trailing twelve months’ revenue of $5.59 billion up slightly over last quarter’s $5.35 billion. That stabilized top line indicates the company is likely bouncing off the bottom of the COVID-19 slump.
Another mark of a great turnaround story: low (beatable) expectations from Wall Street. Unsurprisingly, institutional research analysts aren’t exactly bullish on a turnaround. FY22 consensus estimates call for revenue of $5.67 billion. GME is already on a run rate to meet this number. Simply put, the Street isn’t planning on any incremental turnaround at GameStop this year.
The new management team is also impressive. Under the activist-style leadership approach of Chairman Ryan Cohen, formerly CEO of Chewy, GameStop hopes to transform towards an ecommerce-centered approach. “Papa Cohen,” as he’s affectionately called by the Reddit crowd, once held as much as 13% of the company. Having seen his initial investment in GME grow by more than 2500%, it’s fair to say he’s got skin in the game.
Cohen has beefed up the incoming GameStop leadership team with ecommerce executives, including Amazon veterans Elliott Wilke and Matt Francis, who serve as GameStop’s chief growth officer and first chief technology officer, respectively. Cohen’s also focused on enhancing customer support, adding new products and opening more distribution facilities to speed up deliveries. Earlier this year, GameStop added new facilities in Reno, Nevada, and York, Pennsylvania. These additions add a total capacity of more than 1.2 million square feet.
Taking on a Challenge
Cohen, like the beloved Ted Lasso, is no stranger to playful quips — reminding investors to “buckle up” for big sweeping changes at GameStop. But for GME stock to work in the long run, GameStop needs to diversify and grow its revenue and boost margins.
The company still relies mostly on hardware sales to drive the top line. The software business remains a slow grower. GameStop is working on ways to diversify away from hardware sales, but it’s still early stages. Collectibles revenue, for example, the smallest revenue contributor, is still very volatile.
Margins are also still too low and relatively unstable. Just look at GameStop’s most recent quarterly earnings. Gross margins last quarter were just 27.1% of revenue, owing to the commoditized nature of most of GameStop’s revenue. Retailers generally can’t be profitable with gross margins below 30%.
There’s still a way to go in GameStop’s turnaround. Investors should expect continued volatility, and the company still does not provide forward guidance. To quote Ted Lasso, “Taking on a challenge is a lot like riding a horse, isn’t it? If you’re comfortable while you’re doing it, you’re probably doing it wrong.”
Bottom Line on GME Stock
Following a roughly 13% sell-off after a lackluster Q2 earnings report in early September, GME stock looks more attractive by almost any measure. Massive capital raises have reset the balance sheet and GameStop now has over $1.7 billion in cash. A stronger capitalization structure gives this turnaround story ample time to survive and potentially invest in fulfillment, sourcing, or any other part of the value chain. And on a price-to-sales basis, the stock trades at just over 2x forward sales, down from a peak valuation of over 4x.
With a new management team, a refreshed balance sheet, and a legitimate turnaround story taking shape, GameStop is much more than the sum of its parts. As Ted Lasso once said: “I believe in ‘Believe.’” Or, to quote Reddit: CAN’T STOP❣️ WON’T STOP ❣️GAMESTOP ❣️