GameStop Stock Set to Test Price After Bitcoin News Turns Heads
Shares in the former meme stock are rising after strong financial results and a surprising plan revolving around cryptocurrency.
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On Tuesday evening, former strip mall stalwart GameStop GME posted the firm's fiscal fourth quarter financial results.
For the period ended February 1, GameStop posted an adjusted EPS of $0.30 (GAAP EPS of $0.29) on revenue of $1.283 billion. The bottom-line prints crushed expectations despite a top-line number that not only reflected a year-over-year contraction of 28.5% but fell short of Wall Street's estimates.
Increased profitability on decreased sales? Exactly. GameStop did an excellent job of cutting back on both the cost of sales and operating expenses, which boosted margins sharply.
While the performance is positive in a very overt way, declining sales would ultimately be problematic. Still, the shares traded higher overnight and are up more than 10% on Wednesday morning from where they closed on Tuesday afternoon. What's the deal? On Tuesday evening, the firm announced that its board of directors had unanimously approved an update to its investment policy to add Bitcoin. For those about to ask, GameStop, though still considered a meme stock by some, ended the quarter with a cash stash of $4.76 billion.
CEO Ryan Cohen is clearly taking a page out of Strategy MSTR CEO Michael Saylor's book. In fact the two have been photographed together this year. Yes, Strategy is the firm formerly known as MicroStrategy. That firm has been a major investor in Bitcoin for years and, with its Bitcoin holdings dwarf its actual business, has become known on Wall Street as something of a proxy for Bitcoin itself, though there are now ETFs that get that done for investors.
GameStop Operations
As revenue contracted 28.5% to $1.283 billion, the cost of those sales contracted 33.1% to $919.2 million. This left a gross profit of $363.4 million (-13.3%) as the firm's gross margin improved significantly from 23.4% to 28.3%. Operating expenses decreased by 21.4% to $282.5 million. After a minor impairment expense, GAAP operating income printed at $79.8 million, up 44.6% from the year-ago comparison. GAAP operating margin not only improved but doubled from 3.1% to 6.2%.
After accounting for interest, other income and expenses as well as taxes, GAAP net income hit the tape at $131.3 million, up 108% (not a misprint) from the same period last year. That works out to a GAAP EPS of $0.29 per fully diluted share, up from $0.21. Obviously, the firm's share count increased substantially... by about 46%.
GameStop Revenue Streams
- Hardware and Accessories sales decreased 33.7% to $7.25.8 million
- Software sales decreased 38.5% to $286.2 million
- Collectibles sales increased 15.8% to $270.6 million
GameStop Stock Fundamentals
For the quarter reported, GameStop generated operating cash flow of $162.3 million, out of which came capex spending of just $3.5 million. This left free cash flow of $158.8 million, up from -$18.7 million a year ago. For the full year, GameStop drove free cash flow of $129.6 million, up from -$28.6 million last year. Talk about a turnaround story based upon fiscal discipline despite a core business that remains in decline. This management team has done an outstanding job.
Turning to the balance sheet, the firm ended the quarter/year with current assets of $5.355 billion. This included a cash position of $4.775 billion (cash and marketable securities) and inventories of $480.2 million. Current liabilities add up to $665.4 million. That includes almost no (just $10.3 million) short-term debt. The firm's current ratio stands at a superhuman 7.18 with a quick ratio of 6.46. Folks sometimes joke on GameStop. Maybe they better stop. There are not too many balance sheets out there like this.
Total assets amount to $5.875 billion, with the firm reporting no value for anything intangible. We like that. Total liabilities less equity comes to just $945.6 million. The firm has long-term debt of just $6.6 million. This is one of the strongest balance sheets you will ever find in corporate America.
My Thoughts on GameStop Stock
There was no conference call. I don't like that, but that's the way GameStop has done business since Cohen took over.
The stock trades at 127-times trailing 12 months' earnings, which is down from 283 times just eight months ago. That's a problem for a firm that cannot grow. It's difficult for me to invest in declining businesses. Short interest stands at 7.5% of the entire float. That's a lot, but it's not crazy. It's certainly not meme stock material.
It's also hard for me not to invest in growing cash flows and strong balance sheets. Who doesn't love fiscal discipline, especially when it works? This firm does have those things going for it. I don't know how much the Bitcoin thing matters to me with Bitcoin ETFs out there and spot Bitcoin widely available. This move kind of sounds like it comes from a firm that's out of ideas.
The stock has traded technically over the past four plus months, so it makes sense for that to be what we go by. GME sold off coming into the new year coming off of a double-top pattern of bearish reversal. GME proceeded to put together a nearly three month long falling-wedge pattern of bullish reversal. We are witnessing that breakout right now.
Relative strength has spiked. The daily MACD has improved, but I think the GME bulls would still like to see that 26-day EMA rise above the zero-bound. The pivot had been the 50-day SMA, and that spot was taken in slingshot fashion on Wednesday morning, creating an unfilled gap that could weigh upon the stock price in the short- to medium term.
My expectation is that GME will test the 50-day SMA from above, making the stock a short-term short idea at these prices. That said, the last sale of Bitcoin once the firm starts stuffing its balance sheet with that cryptocurrency and how that impacts the strength of that balance sheet will decide where GME goes longer-term. I am not investing in GME at this time. I may consider it upon a gap fill that approaches the 50-day line.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
