Summary

• GameStop's stock surged 7% after CEO Ryan Cohen's photo with Michael Saylor, sparking speculation about potential Bitcoin treasury plans.

• Despite recent volatility, GameStop's long-term technical outlook appears positive, though short-term indicators show bearish trends.

• GameStop's $4.6 billion cash hoard could lead to significant upside if invested in Bitcoin, but this remains speculative and risky.

• Given the high uncertainty and potential risks, I'm not interested in buying the rumor.

Aziz Shamuratov /iStock Editorial via Getty Images

OG meme stock GameStop (NYSE:GME) made waves in Monday’s session on a photo CEO Ryan Cohen posted on X, showing him with Strategy (MSTR) head Michael Saylor. Shares are up about 7% since Friday’s close on the news, implying investors are indeed buying the “news” that the company may be eyeing becoming a Bitcoin treasury company.

I’d argue that this has been a possibility for some time, and is not the first time it’s come up. In addition, I’d argue that buying any stock because of any photo an employee posts on social media is borderline absurd. However, here we are, so let’s dig in.

A constructive chart

GameStop has been bouncing around a lot of late without a clear direction. The daily chart shows trendline support was held earlier this month, which is a positive sign.

StockCharts

However, the two major moving averages are both downward sloping, and the stock is below the 50-day SMA, neither of which are good. The PPO is below the centerline, and the RSI is showing weakness, having been below the centerline for weeks now. These are not good developments for the bulls. The daily chart leans bearish in my view, but not enormously so.

The weekly chart looks more constructive to me.

StockCharts

The momentum picture is totally different, with both trading above their respective centerlines. The moving averages are also both up trending, and the stock is ahead of both. From a long-term perspective, then, GME shares actually look pretty good.

To sum up the technical picture, I don’t particularly like the daily chart, but the longer-term trend looks well intact. It’s not enough for me to want to own it given the other factors in play, but it looks okay.

Let’s now get to the fundamental picture, including the idea that GME should be bought for potential Bitcoin exposure.

What would Bitcoin treasury be worth?

Before we get to answering that question, let’s take a look at what GME looks like today. We’ll start with the balance sheet, as that’s what’s in question with the Saylor photo.

TIKR

GME has issued lots of stock over the past few years since the meme stock craze, and rightfully so; it issued shares at very high valuations to take advantage of favorable funding terms. The net result is about $4.6 billion in cash and equivalents as of the most recent quarter.

We can see the company has been generating $124 million in annualized interest/investment income from its balance sheet as of the most recent quarter. For some time now, GME has been stacking cash on its balance sheet with no real plan of what to do with it. That hasn’t changed as far as I can tell, and unless and until it does, we’re looking at what is essentially a bond fund with a dying retail business attached to it.

For now, the retail business is roughly breakeven, and shares are trading at ~95X TTM interest/investment income. Said another way, it’s ~2.6X cash and equivalents.

What would happen if the speculation over the photo became reality? The speculation is that GME is going to get into becoming a de facto Bitcoin fund, similar to MSTR. It makes sense, then, that GME might trade similarly to how MSTR does if they were to employ the same strategy.

MSTR trades with a market cap of $80 billion and has Bitcoin worth about $46 billion. These numbers change every day, but for the purpose of this exercise, it’s good enough. That puts MSTR at ~1.7X its Bitcoin value, but the key is that it is funded with debt, mostly. On a tangible book value basis, MSTR trades for ~4.3X its net asset value. Given MSTR’s software business is meaningless at this point (similar to GME's retail business), I’d argue a tangible book value multiple of some sort is the most effective way to value it.

That gives us a baseline, but the key is that GME could get into Bitcoin treasury without the use of debt. MSTR’s Bitcoin purchases are pretty much all debt-funded in some form or fashion, but GME’s balance sheet is very clean. That would mean it could receive a premium multiple on a tangible book value basis if it were to employ this strategy, as its Bitcoin treasury would be much less risky than the strategy MSTR employs. It's also possible it gets a lower multiple than MSTR, to be fair.

Before we get carried away, GME hasn’t actually said it plans to do anything with its $4.6 billion, so this is all speculation. But if it were to buy $4.6 billion of Bitcoin, what would that be worth?

If we use MSTR as an example, 4.3X NAV would be ~$46 per share based upon December's tangible book value of $10.75 per share. That would be ~74% higher than Tuesday’s close, which would be significant, obviously.

We have no idea what multiply the market would assign GME as MSTR is in a class of one in terms of existing only to own Bitcoin; it's not like we 10 or 20 companies we can examine valuations for. But it’s an interesting exercise on the idea that GME may employ the same strategy.

The question one must ask then is, do you think GME is going to go all-in with Bitcoin? If the answer to that question for you is ‘yes’, buying at $26 probably makes a lot of sense. The idea that it would be valued at least somewhat like MSTR means the upside from $26 would likely be sizable, to say the least.

However, you must also assess the risk that GME continues to do nothing with its cash besides act like a bond fund. This is where I struggle with the bull case for GME. Possible outcomes include the company doing nothing, but also just dipping its proverbial toes into the waters of owning Bitcoin. In other words, maybe GME buys $500M or $1 billion of Bitcoin and keeps the rest as interest-bearing assets. In that range of cases, I don’t think there’s meaningful upside to the share price.

What to do, then?

The question here is whether or not GME is going to finally do something with its cash hoard. A photo on social media is not enough for me to want to suddenly believe GME is going to drastically change its capital allocation strategy. If I assess the range of outcomes here, most of them result in GME not being particularly attractive.

The odds of GME doing nothing, or just beginning to allocate small portions of its balance sheet to Bitcoin are high given its past behavior. Only in an all-in scenario could we see meaningful upside potential to GME, but the range of outcomes looks neutral to me on balance.

Keep in mind the other risk that even if GME goes all-in and gets rerated higher, Bitcoin could break down and enter a bearish phase. That could negate most or all of any potential gains in the share price from a higher multiple, and I suspect this is a big reason why GME management hasn't done anything with its cash to this point. Of course, Bitcoin can go up and make the stock worth even more, but you have to balance the risks here.

I certainly do not want to short GME here, and I think if you want to own it, there’s enough evidence to support a long case. I simply don’t think the Bitcoin case is strong enough to warrant a big rerating of the valuation for now. Maybe that changes, but the evidence we have today suggests it remains a hold. It is far too risky, in my view, to buy GME on a rumor.