How GameStop’s business (d)evolved between manias

Before GameStop was a meme stock, it was a business. And although now its most popular product may be the profit-making opportunities and entertainment it provides for day traders and the general public, there’s still a real company behind those lines on charts that move violently up and down.

That the company was an undervalued, attractive investment opportunity was what attracted Keith Gill to GameStop as early as mid-2019. His thesis was simple:

1. With the launch of the new PS5 and Xbox consoles, the company had a big opportunity to generate positive cash flow, while it was being priced for near-imminent obsolescence.

2. Short interest in the stock was high, so the upside potential could be explosive if sentiment shifted positively.

3. There was a unique opportunity for GameStop, with its 60 million PowerUp loyalty members, to reinvent itself and carve out a better, more sustainable niche in the broader $150-billion video game industry.

As Gill was winding down his YouTube videos, Joe Fonicello and Rod Alzmann were launching GMEDD.com. Both had also been touting the case for GameStop as an attractive value investing opportunity, making points that were similar to – and echoed by – Gill.

Fonicello and Alzmann cashed in during GameStop’s parabolic surge in January 2021. And while they still track the company closely, neither of them have had positions in the stock during this most recent rally. And that’s because, in their opinion, the fundamentals simply no longer support a bullish stance.

Their views on how the company has — and hasn’t — evolved over the past three years is another reminder of how GameStop, originally a deep value play, has metastasized into a pure momentum story wrapped in a blanket of dreams.

It’s a tale of accelerating secular pressures, missed windows, abandoned pivots, and curbed expectations.

Life comes at you fast

“The evolution of the mix shift from physical to digital gaming has happened faster than we thought back in 2020,” said Alzmann. “The fundamental story is weaker than I would’ve thought three and a half years ago.” 

In other words, the squeeze on GameStop’s legacy business of selling video games has been surprisingly intense.

Annual revenues have fallen in the past two years. GameStop’s business is very seasonal, with fourth-quarter revenues (Christmas time!) far outpacing the rest of the year. That being said, even the company’s own high estimate for Q1 sales, $892 million, would mark its worst quarterly revenue total since 2005 – right before the release of Xbox 360. 

Missed opportunities

The addition of Ryan Cohen to the board of directors in 2021 was a milestone moment for the stock. The Chewy.com co-founder and CEO managed to scale the company until it carved out a sustainable niche in the US pet industry — the exact kind of path to success GameStop bulls are hoping for.

After joining the company, Cohen ushered in a corporate overhaul that saw new employees join from the likes of Amazon, Google, Microsoft, Walmart, and Zulily, to name a few — and some from Chewy, as well. These were hardly the types of hires that GameStop had been making in the past and gave the sense something transformative was in the works.

There were hopes to quickly launch a marketplace for non-fungible tokens (NFTs), unique tokenized assets on the blockchain, by around year-end 2021.

“This was a totally different time in crypto, and NFTs were the hottest thing on the street,” said Fonicello. “If GameStop could get a tiny percent of its power rewards members, it could have one of the biggest NFT marketplaces in the world.”

Execution issues got in the way and the company missed its window. By the time the marketplace was up and running in 2022, a crypto winter had begun.

Pivot to and from e-commerce

It was seemingly a fait accompli that Cohen, whose first huge business win was with a company that has .com at the end of its corporate name, would bolster GameStop’s e-commerce presence.

But by the end of 2022, it was clear these efforts had fallen flat, with the Wall Street Journal reporting that e-commerce sales were in decline and the company was paring back its omnichannel aspirations.

The about-face on e-commerce does make some sense, notes Alzmann. “Betting on its physical stores — that’s where more cross-selling and higher-margin selling happens,” he said. 

Alzmann reckons that one path to reinventing the company — or at least, creating different revenue streams — runs through collectibles. To this end, GameStop recently announced that it is getting into the Pokémon card business.

Cashing in

Of course, the past three years haven’t been a never-ending string of bad news.

Cohen, who would take on the role of CEO in September 2023, has managed to adapt when certain tactics didn’t gain traction rather than sticking with losing bets.

“The objective went from really lofty goals in blockchain and crypto, focusing on e-commerce, and a big vision to certainly changing back to a path that is more focused on simply profitability,” said Fonicello, noting that the higher interest rate environment may have somewhat blunted Cohen’s ambitions. 

Measures to control costs are bearing fruit, too.

“The core operation is no longer materially bleeding cash on a full year basis,” said Alzmann. “The preliminary Q1 numbers were kind of ugly, but full year operating cash flow will likely be slightly positive, while net income benefits from nearly $100 million in interest income from their cash pile.”

And, of course, Cohen — with a large assist from Gill — has been effective at shoring up the company’s balance sheet. After a share offering in 2021 and another one last month, GameStop is sitting on about $2 billion in cash.

“He’s had success in the way he’s been able to generate capital for the business through these stock sales,” said Fonicello. “That’s the obvious one you can rely on.”

The key question is whether this extra cash will be used to provide GameStop with a longer runway to continue current operations, or a wider runway to pursue other revenue-generating opportunities. Or something in between.

The Cohen premium

At the same time the GameStop stock thesis had devolved into a cult of personality focused on Keith Gill, the GameStop business bull case shifted to a cult of personality centered on Ryan Cohen.

In January 2021, as shares were mooning, Gill said, “I think the stock is deserving of the move because of Ryan Cohen and what he represents.” A bet on the company at this point was a bet on “him and his vision,” Gill added, and it was easier to imagine success with him at the helm.

A month later, he echoed those sentiments before Congress, telling Representative Stephen Lynch:

“A lot has happened in recent months to suggest that GameStop could indeed turn around its business significantly. And one big element of that is indeed one of the largest investors in GameStop, Ryan Cohen, and he has brought in some colleagues that could help him turn around this company.”

Fast forward a few years, and the song remains the same. 

The stock is obviously untethered from its fundamentals. But if we had to tell a story, we could make the case that GameStop is kind of being valued like a special purpose acquisition company (or SPAC), with investors willing to pay a large premium for Cohen’s leadership and what he might do with a big pile of money. Even though he hasn’t done much with a pile half as large so far.

“The physical video game store is not an attractive investment opportunity,” said Fonicello. “The $2 billion in cash that Ryan Cohen may get to turn into some investment operation — that’s the compelling thesis here.”

“There’s a lot of hype and hope attached to Ryan Cohen, a leader that has a history with Chewy that people are clinging to,” added Alzmann. “The big question is, what’s the Cohen premium worth?”

GameStop, at its essence, has become a story of $2 billion and two people: one who is able to rouse the masses and raise cash, and another who is still being trusted to deliver with that windfall.