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Market Insights

Stock of the week: Gamestop

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The Gamestop turnaround story took another twist in the last quarter. Even as net sales rose 6.2% to $1.88 billion, gross profits fell 15.7% for the quarter and the firm ended up posting a net loss of $147.5 million, compared with a profit of $80.5 million a year earlier.

Chief Executive Officer Matt Furlong explained:

"The combination of supply chain issues and the Omicron variant had a sizable impact on this past year's holiday season,"

The stock gapped down on the open, before buyers enthusiastically stepped in. The daily candle closed green, engulfing the prior three days of price action.

Gametop one day trading view chart

Typically, this kind of price action is associated with a positive shift in fortunes, but the company has just posted a surprise loss…

What’s going on?

There’s little doubt Gamestop is in the midst of a major rebuilding process. CEO Furlong noted in the earnings call:

“We have learned from the mistakes of the past decade when GameStop failed to adapt to the future of gaming. It is important to stress that GameStop had become such a cyclical business and so capital starved that we have had to rebuild it from within. We've also had to change the way we assess revenue opportunities by starting to embrace, rather than run from, the new frontiers of gaming.”

Further investments will be required. Capital expenditures for the quarter increased by $21.3 million, but it's worth noting that this was the first quarter in which revenue growth surpassed pre-pandemic levels.

Furlong also highlighted the potential in NFT’s:

“We invested in a dedicated blockchain team and new capabilities to drive the development of initiatives such as our NFT marketplace, which we expect to launch by the end of the second quarter; we see significant long-term potential in the more than $40 billion market for NFTs”

Not everyone was impressed. Yahoo Finance guest Steve Sosnick commented:

"This is not a normal investing situation. There is nothing normal about this. So the stock is going to do what it's going to do. My gut — based on my history of watching stocks like this — is they usually resolve themselves to where they should be based upon earnings, cash flows, projections. I just don't see where it is in GameStop,"

"I just don't see why this is a $90 stock. It doesn't make money. There is no real plan for making money."

Reggie Fils-Aime (Former head of Nintendo America) stepped down from GameStop's board of directors citing the same issue:

  • "There has not been an articulated strategy"
  • "Leadership says we don't want to articulate our strategy because we don't want it to be stolen. To me, that was not acceptable."

In a hyper-competitive market environment, perhaps it makes sense to play your cards close to your chest while the recovery takes shape.

Revenue growth is picking up, but total revenues of just over $6 billion for the year were still well below the $8.3 billion the company hauled in 2018.

Furlong’s closing statement focused on the long-term transformation plans:

"We know the investments and sacrifices made in fiscal year 2021 will take time to yield tangible value, but we are completely comfortable with that. If GameStop is going to once again become a market leader in gaming and also realise new revenue opportunities across emerging communities, we needed to lay a lasting foundation rather than taking shortcuts. That is what we did over the past year, as we started to transform into a technology company,"

The message seems to be “trust us, we’ve got this”. But with details on the strategy remaining light, will investors lose patience before the transformation completes?

Not investment advice. Past performance does not guarantee or predict future performance.

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