GameStop’s business is getting better. The stock is getting cheaper.
The cost of betting on hopes and dreams seems a lot lower when net income and operating income are turning higher.
If you look at it a certain way… GameStop is trading kind of cheap.
The embattled video game retailer turned collectibles company has a market cap of over $10 billion. But roughly half of that is tied to the company’s net cash and short-term investments — largely US Treasurys, but also recently adding Bitcoin to that list.
How is the underlying business being valued?
Well, GameStop’s market value is about 1.7x its expected sales in 12 months’ time, which is at the lower end of its range since May 2024, when the return of Keith Gill, aka Roaring Kitty, fueled another meme mania for the stock.
Compare that to Broadcom, whose market cap (less net cash and short-term investments) is about 17x its 12-month forward expected sales. Of course, that reflects investors’ belief that the chip designer’s sales will grow over time, a sentiment that is not shared with respect to GameStop.
The company hasn’t grown annual revenues since 2021, and isn’t forecast to do so this year or the next. That being said, sales aren’t everything. GameStop’s expense control has been admirable, especially since Ryan Cohen took over as CEO, to the point that the firm has generated an operating profit over its last four quarters despite a shrinking top line, and is forecast to do so for the 12 months ending January 2026.
Couple that with the money it’s spinning off from its barbell investment strategy of Treasurys plus bitcoin (though the latter is down since its date of purchase), and you’ve got a stew going. That’s what the newly positive trend for net income suggests. At the very least, the cash pile and the operating performance have translated to a longer and wider runway for the firm than what prevailed from early 2021 through April 2024.
Or if you prefer another more commonly cited valuation measure, the ratio of GameStop’s enterprise value (that is, market value plus debt less cash and equivalents) to its trailing free cash flow has plunged, recently hitting its lowest levels since before the 2021 craze that inspired books and movies.
GameStop’s pivot to bitcoin has not been well received by the market. But ever since its rally in the second half of 2020, when the stock was a textbook value play, it’s been a name you can dream on.
And the cost of dreaming has gone down.
