GameStop: Not the Same Stock
As it was in 2021 or 2019 (Valuation inside)
When Roaring Kitty made headlines a few weeks ago after he appeared on GameStop’s radar again, MarketLab and I decided to collaborate to write about it. However, life got in the way and this article got delayed until now.
Nonetheless, it’s pretty likely that Keith Gill will get involved with GameStop again at some point in the future. This article is intended to give readers the key data points to think about GameStop’s valuation, and what its primary needle-movers are.
Out of curiosity, I actually did go through Keith’s first GameStop video all those years ago in preparation for this article. I have to admit, it was a pretty well-researched analysis. He was looking at stuff like the aging of their receivables and prognosticating on whether the App Store revolution could actually be a good thing for GameStop’s B&M retail business. So credit where credit is due.
If you haven’t heard of MarketLab before, check them out at the link below. They made the snazzy-looking charts in this article, and do the same for many other popular companies on their Substack.
Recap: Michael Burry & the Roaring Kitty
As Michael Burry’s initial prophesy foretold, GameStop was a melting B&M retail ice cube in an age where games were increasingly being bought on digital platforms, e.g. Steam or Playstation Store. However, at one point its market cap fell to just $300M in mid-2019, while its Enterprise Value fell to just shy of $1B.
At the same time, it held about $800B in Net Cash, making it a true cigar butt of its time.
We all know how that turned out. Roaring Kitty a.k.a. Keith Gill started tagging along to Burry’s thesis, and finally got his lucky break in Jan 2021 when a confluence of factors came together to trigger what is now known by market historians as “The Gamma Squeeze”.
Fast forward to the present-day minus a few weeks. Roaring Kitty suddenly appeared on everyone’s radar when he posted a huge new position in GME, and announced that he would do a livestream. However, what was different this time was that GameStop wasn’t the Same Stock.
Firstly, it wasn’t the deep-F-value stock that it was in 2019 with Net Cash = 2.5x Market Cap. Nor did the market for its shares exhibit the same pent-up conditions which enabled the gamma squeeze in 2021.
Hence, RK’s sudden announcement of his position and his subsequent contextless livestream left everyone slightly bewildered. In the meantime, GME’s management did what anybody in their position would do — take advantage of the irrational surge in share prices to raise cash by issuing ~25% more stock.
GameStop: Valuation in 2024
1. Business Model: Questionable
2. Not Even Trying
3. Valuation: ??Fortunately, GameStop isn’t a difficult business to value. There’s only a few moving parts which substantially represents what could potentially move the needle for their valuation.
Before we start, I just want to highlight that all of the financial data used here was lifted from TIKR.com. I don’t see why there should be any substantial errors, but I just thought it was worth doing a full disclosure.
Without further ado, let’s get into it.
Business Model: Questionable
Firstly, focus on the three lines at the bottom of the chart above:
Operating Margin (blue),
Net Margin (purple),
“EBITDAE” margin (orange, i.e. EBITDA + Extraordinary items).
One thing all of them have in common is that they’ve been consistently hugging each other since FY20. In fact, if we only compare the orange & blue lines, they’ve practically been hugging each other since the beginning of time. This implies two things:
Gamestop’s Operating Margins substantially represent all of their Net Margins;
All of their P&L needle-movers are situated prior to their EBITDA/Operating Profit line.
In other words, the gap between their Gross Margins and their Net Margins = SG&A expenses alone (almost). These includes costs like Sales & Marketing, employee salaries, R&D, etc.
Considering that their Gross Margins (top blue line) have only deteriorated by a relatively benign -5% over the past decade, we can affirmatively conclude that the chief culprit behind their Net Margin decline has been Gross Profits falling faster than their SG&A expenses.
The chart below proves this — Gross Profits have fallen by -6.3% CAGR since FY13 (blue dot, rightmost), while SG&A expenses have only fallen by half of that or -3.3% CAGR (green dot, rightmost) over the same period:
Unfortunately, GME doesn’t disclose the breakdown of their SG&A expenses on a more granular level, so we can’t determine whether it was for instance, Sales & Marketing expenses or Employee salaries which had a bigger impact on their earnings/losses.
However, we can conclusively ascertain at this point that Gamestop’s current business model is unsustainable, given how it hasn’t even attained breakeven Operating Margins since FY19. Something has to change, or shareholders will continue to bleed cash.
Not Even Trying
This narrative can be confirmed by observing their historical cash flows. We can see from the chart above how GME’s Net Profit, OCF and FCF have more or less been in negative territory since FY19. This is pretty much the nail in the coffin for the “GME’s valuations are based on fundamentals” argument.
Worse yet, we can see from the chart below how this is unlikely to change anytime soon, given that their historical CAPEX has consistently been less than their depreciation (black line):
The takeaway here is that management isn’t really investing in growth CAPEX. This implies that management isn’t even trying to pivot the legacy business away from its melting ice cube status quo.
Valuation: ??
So what exactly are you paying for when you buy GameStop’s shares — or in other words, how do we value GME? With historically negative Net Margins and ROA/E/IC, the only way we can even begin to approach their valuation is via their Net Asset Values (i.e. balance sheet).
The sole consolation amidst GME’s financial statements is that they at least have a mediocre balance sheet position. The chart above shows how their latest Book Value (blue bars) and Net Cash (green bars) remain in relatively healthy positions.
However, we can also see that their current P/B ratio stands at a whopping 8.3x (black line, rightmost). As I’ve explained at length in the article linked below, buying their shares effectively means you are paying an 8.3x premium to acquire their Net Assets. In the absence of profits or cash flows, I’ll let you decide if that’s overvalued or not.
GameStop: Not The Same Stock
Hence, we can conclusively say that GME is not the same stock as it was in 2019, when Michael Burry first announced his GME position. As the chart above shows, it was trading at a mere 0.4x P/B at the time vs. 8.9x today. Dr. Burry, this ain’t.
Nor is it the same stock that it was in 2021, where a confluence of market factors came together to effect the now infamous “gamma squeeze”. At the time, total short interest represented a 4th-wall breaking 145% of its free float, which enabled covering shorts to send its stock price to stratospheric heights. In contrast, GME’s total short interest today is only 11% of its free float — even lower than its historical average of roughly 20%.
Hence the title of this article:
“GameStop: Not The Same Stock”
More Amazing GameStop Charts by MarketLab:
Check out my previous articles about Value Investing:
Unpopular Opinion: Diversified Portfolio > Concentrated Portfolio
Value Investors = Business Owners. Here's The Irrefutable Proof.
How I Became 100% Convinced that Value Investing Was Superior
Disclaimer: This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the authors. To the best of the authors’ abilities and beliefs, all information contained herein is accurate and reliable. The authors may hold or be short any shares or derivative positions in any company discussed in this document at any time, and may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. The content of this document is not intended to constitute individual investment advice, and are merely the personal views of the author which may be subject to change without notice. This is not a recommendation to buy or sell stocks, and readers are advised to consult with their financial advisor before taking any action pertaining to the contents of this document. The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. Any or all forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond the authors’ control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision. | A guest post by
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