GameStop (NYSE:GME) is the original meme stock, surging to incredible levels in previous meme stock mania bubbles. This stock is down considerably from its 2021 highs, but has also seen its fair share of surges. In fact, GameStop stock is actually up 19% on a year-to-date basis.
That said, despite its recent moves higher and previous nostalgic rallies, it’s hard to ignore the underlying fundamentals of GameStop’s core business. The company’s fiscal Q1 results for the period ending May 4 were hard for many investors to swallow, with the company’s core business struggling. Revenue dropped to $882 million in amid a $32.3 million net loss.
Although the net loss was worse in Q1 2023, it signals cash burn amid a shrinking business. GameStop ended the quarter with $1.083 billion in cash versus $848.3 million in current liabilities. Low-interest debt helps, but closing 54 stores year-to-date suggests the company is still struggling.
GameStop’s stock surges with short squeezes but quickly crashes, up 71% year-to-date with two sharp spikes. Despite a $10 billion market cap and a price-to-earnings ratio of 260x, the company’s Q1 revenue continues to fall. The stock, driven by speculation, is likely to face a significant pullback as fundamentals take precedence.
Bed Bath & Beyond Sues Ryan Cohen
The former Bed Bath & Beyond sued Ryan Cohen and RC Ventures LLC to recover $47 million from alleged insider trading in 2022. Cohen, founder of Chewy (NYSE:CHWY) and CEO of GameStop, is accused of using insider information while acting as BBBY’s statutory director to trade BBBY stock profitably. The lawsuit, filed in the U.S. District Court for the Southern District of New York, claims Cohen and RC Ventures made profitable trades within six months, violating the 1934 Securities Exchange Act. Bed Bath & Beyond seeks to recover these short-swing profits.
The former Bed Bath & Beyond claimed board appointees gave the defendants access to nonpublic information about BBBY. The suit, part of efforts to recover funds for creditors, was filed by bankruptcy plan administrator Michael Goldberg. He also sued a New Jersey agency for $19 million in tax credits and seeks over $300 million in trading profits from Hudson Bay Capital Management. Both cases are pending in their respective courts.
Financials Are In a Slump
GME released Q1 2024 financial results in June. Net sales dropped to $882 million from $1.237 billion year-over-year. SG&A expenses were $295.1 million, 33.5% of net sales, up from $345.7 million, 27.9% of net sales, last year. The company ended the quarter with $1.083 billion in cash and marketable securities, and long-term debt remains a low-interest, unsecured term loan from the French government’s COVID-19 response.
GameStop, with a nearly $9 billion market cap, hasn’t held a conference call since Q4 2022. The Q1 2024 results met its guidance range, but no future guidance was provided. Former CEO Matt Furlong stated they prefer stockholders to judge them by results, not forecasts.
Moreover, GameStop’s latest filing revealed that its board approved a new policy allowing Cohen to invest in equity and financial instruments. Cohen can invest in the same companies as GameStop, aligning his personal investments with the company’s interests. The old policy restricted investments to short-term securities and its own operations. In 2024, Cohen is likely to use GameStop’s $1 billion cash to invest in other companies, potentially through RC Ventures. This could diversify GameStop’s struggling core business.
Analysts Think GME is a No-Go
Critics argue that GameStop’s new investment policy signals a lack of faith in its core business, favoring investments in other companies. Michael Pachter, a Wedbush analyst, says that the movement GME has been doing looks “alarming.” He also says Cohen’s leadership is unstable and may need a management turnover soon.
Also to note, in early May, GME surged as Keith “Roaring Kitty” Gill made a reappearance. June saw Gill’s public disclosures and GameStop’s stock offering, driving shares up to $48. Although it made a stir in the meme stock market, Wedbush still maintained a “sell” rating for GME and reduced its 12-month price target to $11 from $13.50.
To add more criticisms, GME’s new investment policy also gained concerns. Despite being near profitability and having a strong balance sheet, GameStop could potentially evolve into a holding company under Cohen’s management.
Moreover, with a shrinking market and over 306 million shares outstanding, GameStop faces challenges from digital gaming. Its $11 billion valuation and potential for further dilution make it more suitable as a trading stock rather than a long-term investment.
I can’t agree more with analysts’ assessments of GameStop. At its current valuation, this stock seems significantly overvalued despite recent drops from prior short-squeeze rallies.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.