Summary

• I give GameStop Corp. a hold rating.

• The company suffers from negative annual free cash flow and low-quality earnings.

• GameStop is also overvalued in metrics such as forward P/E and price-to-book value (when paired alongside return on assets and return on equity ratios).

• But the company also has a lack of long-term debt, with total assets worth $6.24 billion, which includes $4.58 billion worth of cash and cash equivalents.

• The company also carries the identity of being a meme stock and, therefore, has unpredictable short-term price movement.

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Investment Thesis

I give GameStop Corp. (NYSE:GME) a hold rating because, although the company suffers from low-quality earnings, is overvalued, and has poor management at the helm, the company also has a lack of long-term debt, total assets worth $6.24 billion, another $4.58 billion worth of cash and cash equivalents. It also carries the identity of being a meme stock and, therefore, has unpredictable short-term price movement.

Brief Company Overview

GameStop is a company that offers games and entertainment products through both stores and ecommerce platforms. The company sells three types of products:

1. Hardware and accessories, consisting of new and preowned games from the major console manufacturers.

2. Software such as new and pre-owned gaming software for current and prior generation consoles, as well as in-game digital currency, digital downloadable content, and full-game downloads.

3. Collectables such as apparel, toys, trading cards, gadgets and other retail products.

Below is a snapshot of net sales per category per the company's latest 10-Q:

GameStop Net Sales Per Category (Quarter Ending November 2, 2024) (Author)

As we can see from the company's latest quarterly report, 48.52% of the company's net sales came from hardware and accessories, while another 31.60% came from software, and 19.89% came from the sale of collectables.

The Annual Cash-Related Numbers

Let's start by looking at the company's cash. Per the latest 10-K, below is a snapshot of GameStop's annual cash flow and quality of earnings:

Cash provided by operating activities was -$203.7 million, a decrease of $311.9 million from the end of the previous fiscal year..

Capital expenditures, primarily for technological investments and store-related expenditures, were $34.9 million.

The difference between these two numbers above amounts to an annual free cash flow of -$238.6 million.

Data by YCharts

As we see in the chart above, annual free cash flow has been in the negative since the numbers reported after the 2020 pandemic.

Finally, with net income reported as $6.7 million and more cash reported as net income than cash provided by operating activities, the company suffers from low quality earnings.

None of these long-term metrics look good, so what I would like to do is investigate GameStop's liquidity, both short-term and long-term.

Short-Term Liquidity

Taking the numbers from the company's latest 10-Q, I want to investigate the company's working capital, current ratio, and quick ratio, respectively, to get a rough idea of GameStop's capability of paying their bills in the short term:

• Current assets equal to $5,623,300,000

• Current liabilities equal to $1,099,600,000

  • Working Capital = $4,523,400,000

  • Current Ratio = 5.11

$5.11 in assets that can be turned into cash for every $1 of liabilities is a very impressive. Ready Ratios, for example, lists the median current ratio for computer and software stores at 0.13. And, as seen in the YChart below, both the working capital and the quick ratio have been steadily increasing, especially since the meme stock euphoria of 2021.

Data by YCharts

But to get a more accurate picture of the company's short-term liquidity, let's remove the remove the value of inventory and only include the cash, marketable securities, and receivables, and divide them by the company's current liabilities:

• Cash and cash equivalents: $4,583,400,000

• Marketable securities: $32,800,000

• Receivables: $57,500,000

• Current liabilities equal to $1,099,600,000

This gives us a quick ratio of 4.08, still very impressive given the median quick ratio for the industry of 1.15. And if you pay attention to the YChart below, you'll notice that the company's quick ratio has shot up dramatically since 2024, due mostly to the company's equally dramatic increase in cash and cash equivalents.

Data by YCharts

Long-Term Liquidity

To measure long-term indebtedness, I will be taking the company's non-current portion of long-term debt and combining it with their long-term operating lease liabilities using the numbers from the company's latest 10-Q:

• Non-current portion of long-term debt: $9,600,000

• Operating lease liabilities: $285,400,000

This gives us a total LTD of $295,000,000. Given how much the company has in current assets and cash and cash equivalents alone, this is a very small amount of long-term indebtedness.

If we compare GameStop's long-term indebtedness with that of Best Buy (BBY), for example, we see in the YChart below that Best Buy's long-term debt is eleven times that of GameStop's, though that should be expected given that Best Buy, in general, operates larger stores and sells a wider variety of electronic products. Still, it's probably the closest direct comparison GameStop has to any of their competitors in the market. (Walmart [WMT], Target [TGT], and Amazon [AMZN] are also listed as direct competitors on the company's 10-K, though, I don't think comparing GameStop to these companies' numbers is fair given the much larger sizes and much larger variety of products these companies offer to the consumer.)

Data by YCharts

Another impressive aspect of GameStop's long-term debt, however, is the simple fact that their total level of indebtedness has been declining steadily since 2018.

Valuation Measurement I: Price-to-Book

I'm going to shy away from using a discounted cash flow model that I would traditionally use to value a retail electronic store, given the complexity of giving a company like this both an accurate model for future cash flows and an expected growth rate. And without dividend payments, the best metrics to use in this case are price-to-book and forward PE valuations, starting with the price-to-book using the latest data available from the company's quarterly numbers:

• Stock Price: $33.37

• Stockholders' Equity: $4,804,500,000

• Number of Shares Outstanding: 446,800,365

  • $33.37 ÷ ($4,804,500,000 ÷ $446,800,365)

  • 3.10 = Price-to-Book Ratio

A 3.10 falls right around the average price-to-book value for companies in the electronics (general) sector of 3.28. This is also a much lower value than stocks in the S&P 500 as measured by the IVV fund of 5.19, and even lower than the average value of 10.52 of large growth stocks as measured by the IVW fund. And, when compared to its competitors listed in the company's 10-K, GameStop falls second to last above Sony's (SONY) price-to-book value of 2.33.

Data by YCharts

Return on Assets and Return on Equity

Since we're looking at what seems to be a low price-to-book value, I want to make sure that the company's ratio is not due to a poor ROA. Per the latest annual numbers:

• Total assets by February 3, 2024: $2,709,000,000

• Total assets by January 28, 2023: $3,113,400,000

  • Average Assets = $2,911,200,000

• GameStop's net income equals $6.7 million

  • $6,700,000 ÷ $2,911,200,000 =

  • 0.002 x 100 =

    • 0.23% Return on Assets

My suspicions were confirmed; a profit of $0.23 for every $1 in assets is a poor return; and using the YChart below, we can see that the company's annual ROA is far below the median 6.92 ROA when compared to all competitors listed on the company's 10-K.

Data by YCharts

Measuring the company's ROE is also important in this case for a more thorough valuation:

• Stockholders' Equity (2024): $1,338,600,000

• Stockholders' Equity (2023): $1,322,300,000

  • Average Equity Attributable to Shareowners = $1,330,450,000

• GameStop's net income equals (2024): $6.7 million

  • $6,700,000 ÷ $1,330,450,000 =

  • 0.005 x 100 =

    • 0.5% ROE

Again, a 0.5% return on stockholder equity is a poor return and usage of equity, especially when compared to all of GameStop's competitors as seen in the YChart below.

Data by YCharts

In sum, what we have is a company that seems to be undervalued when simply looking at the price-to-book value, but when compared alongside ROA and ROE metrics is overvalued given that the stock is trading at three times its book value but has a poor return on assets and equity to show for it.

Valuation Measurement II: Forward PE

As for forward P/E, estimates for the next fiscal year I take from LSEG Data & Analytics Stocks Plus Report on GameStop, whose most recent report took EPS estimates from two analysts, with one giving an estimated 0.06 earnings per share, while the other gave an estimated 0.08 earnings per share. Hence, I'll take the average of 0.07 as my denominator, giving the company a forward P/E of 476.71—massively overvalued, especially when compared with every competitor listed on their 10-K, as well as the S&P 500.

Data by YCharts

A Dying Business Model

Based on our analysis so far, we have a company that has some serious staying power given their lack of long-term debt, as well a value of their total assets worth $6.24 billion, which includes $4.58 billion worth of cash and cash equivalents. But I see quite a number of issues:

For starters, the core business model just seems, to me at least, to be dying. Going back to the quarterly numbers mentioned at the beginning of this article, 48.52% of net sales came from hardware and accessories consisting of new and preowned games, as well as accessories such as controllers and gaming headsets.

As someone who spends a decent amount of time playing video games (and I'll admit that I'd probably be a better fundamental analyst if I didn't), there is really no need to go to a store anymore and purchase a physical copy of a game unless:

1. You're trying to save storage space on your console.

2. You don't want to buy a new copy or pay full price for the game, so you go and buy a used copy.

3. You want to resell a physical copy of the game after you're done with it.

4. You're a collector who wants to own a physical copy of the game.

5. You're the type of person who feels that they do not "own" the game unless they have a physical copy of it.

In other words, there is a market for the business model, but it's not the same as, say, twenty-five years ago, when necessity compelled someone to have to go to a physical store and purchase a game. Even if you meet any of the above five criteria, you can still purchase a physical game, new or used, online. Hence, it's no surprise that the company's annual and quarterly revenues have been decreasing steadily since their peak around 2012.

Data by YCharts

The same issues that apply to hardware also apply to the company's sale of software. The Nintendo Switch, for example, has its own digital store where players can purchase games, as well as DLC packs (downloadable content for their accompanying games) such as, for example, new characters and stages. The same applies to the Sony PlayStation and Microsoft's Xbox Series X. Unless the software you're getting from GameStop is discounted or pre-owned, there is no necessity to go to a brick-and-mortar location to get it.

The latest 10-Q highlights these trends, where revenue was down 20.2% YoY for the quarter ended on November 2nd. The company ended with $860.3 million, down from the previous year's $1.08 billion. Hardware and accessories sales amounted to 48.5% of total sales, compared to 53.7% one year ago. Meanwhile, software sales rose to 31.6% from last year's 29.8%, and collectibles totaled 19.9% of sales compared to last year's 16.5%.

Poor Management

I think what makes things worse for the long-term prospects of the company is simple: bad management. They're sitting on $4.58 billion in cash, have a loyal following of meme stock investors (or speculators depending on how you see it), and don't, for example, follow MicroStrategy's example (MSTR) and buy Bitcoin. On top of that, the company is suffering from a dismal return on assets and return on equity. These are all signs of inefficient management.

Unpredictability

The one thing that makes this stock's price action completely unpredictable in the short term, however, is the simple fact that it's a meme stock. This variable alone makes it impossible to predict any short-term price action. Just last year, the stock was trading at a yearly low of $10.01 before catapulting 380% to $48.75 by May 14th, fueled in part by Keith Gill, also known as Roaring Kitty. Only two weeks ago, another one of his posts on X sent the stock shooting upwards, and the stock has been up 12% since.

Data by YCharts

Conclusion

In sum, we have a company with what seems to be a dying business model, is suffering from low-quality earnings, is overvalued, and has poor management at the helm. Just about the only thing the company has going for it is its total assets worth $6.24 billion, which includes $4.58 billion worth of cash and cash equivalents. Hence, I'm convinced of two things: First, I'm convinced that, as of now, the company is dying a slow death, which makes the company a poor investment and long-term hold.

But, second, I'm also convinced that the company has a lot of money, and hence a lot of time, to make changes to their business model. Whether this means they will focus more on ecommerce and less on brick-and-mortar, or whether this means that the company will decide to embrace their meme stock identity and buy Bitcoin and other digital assets, is up to anyone's guess; but I doubt it will happen given that the peak of the meme stock euphoria was three years ago and nothing significant has happened to the company since.

Based on all the above, I can't give the company a buy rating. But the stock is too unpredictable, having never dipped below $10 since the beginning of its meme stock surge in January 2021 and is also loaded with cash and assets. Therefore, it's hard for me to give the company a sell rating as well. So, for the short-term (i.e. for the year 2025), I'll give the stock a hold rating.