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Bear Of The Day: GameStop (GME)

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Another Dying Retail Brand

GameStop (GME - Free Report) is an excellent example of why retail businesses are being phased out. People no longer need to leave their couches in order to purchase the latest games anymore. The amount of video games bought at brick-and-mortar retail stores has dropped significantly over the past decade with downloadable content being consumers preferred method of acquiring these games. GameStop stock has tumbled over 77% in the past 5 years and it continues to fall, down 34% since the beginning of the years.

The number of operating stores in the US has fallen 9.5% in 5 years, while total store count has dropped roughly 13% in the same time frame. GameStop has had falling sales and an even more accelerated deteriorating bottom line, posting their first full year loss in 6 years, in their most recent annual report. Grant it, this was mainly due to the firm writing down its goodwill line item on the balance sheet, but this is a sign of systemic problems within the company. Sell-side analysts have drastically lowered EPS estimates in the past 90 days pushing this stock into a Zacks Rank #5 (Strong Sell)

The video game industry has actually been booming in recent years with year-over-year revenue growth being 18% in 2018. A lot of this growth has been driven by mobile games and game purchases over the Internet, leaving brick-and-mortar video game retailers like GameStop left to die a slow death.

Analysts are expecting to see significant negative year-over-year growth trends on the top and bottom lines from GME for the next few years. With the speed at which analysts are reducing EPS outlook, we could see these estimates falling further along with the stock price.

Liquidation

This company appears to be heading towards liquidation but I wouldn’t sell below a the liquidation price. Currently, the company is holding $748 million in net cash (liquid cash reduced by debt) meaning that the firm could effectively pay all of its debts and still give shareholders $7.30 per share. It is currently trading just above that at $8.60, representing an 18% premium on its liquidation price.

If this company continues to operate under its antiquated business model, I am sure that this liquidation price will continue to fall as they burn through cash. GameStop hasn’t been able to adapt with the industry and looks to be mirroring Blockbusters downfall, which closed its doors just over under 6 years ago. This stock is a sell until they are able to make some substantial material changes to their operations and product offer, or GME falls below the liquidation price. 

 

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