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GameStop: Circling The Drain

Feb. 04, 2019 2:08 PM ETGameStop Corp. (GME)34 Comments
Yanni Lodato profile picture
Yanni Lodato


  • GameStop exhibits a number of intrinsic business disadvantages.
  • The company's financial positioning is progressively weakening.
  • GameStop elicits a sell recommendation.

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Over the past five years, GameStop (NYSE:GME) has sustained a significant deterioration in the company's stock price. GME witnessed a more than 70% downtrend, with share prices falling from 2015 highs of $45 to present levels of around $11. Falling share prices come as a result of a number of fundamental weaknesses in GME's business ranging from a changing distribution channel, substantial retail competition, significant competition from online channels, digitalization of games, and strong growth headwinds. GME's unsuccessful bid for a buyout was not exactly a vote of confidence for existing shareholders. Even still, GME offers a 13.52% dividend yield, prompting deliberation over whether or not it's worth it to collect GME's high dividend and wait for growth to resume. This article will provide an in-depth analysis of GME, discussing business vulnerabilities, growth sentiment, dividend yield, and relevant financials.

Investment Analysis

The preeminent concern facing GME is that digital game downloads will replace physical games that GME has traditionally sold. GME derives an overwhelmingly large concentration of revenues from its legacy video game and tangible hardware sales business. Roughly 81% of revenues come from GME's tangible video games/hardware segment, 11% comes from the technology brands segment, and collectibles and other items comprise the remaining 8%.

GME's legacy video game business encompasses new video game hardware, new video game software, pre-owned and value video game products, as well as video game accessories. The company's large tangible gaming product concentration subjects it to market share erosion as major retailers such as Target (TGT), Walmart (WMT), Amazon, and Best Buy (BBY) etc. offer the same gaming product lines in addition to having much broader revenue diversification. So not only is GME facing market share erosion and margin compression from other retailers, the company also faces a significant

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Yanni Lodato profile picture
Oracle Investment Research helps individual investors find high-quality stocks with strong competitive advantages suitable for long-term holding. We cover dividend stocks, us stocks, and high growth advantageous risk reward stock opportunities ----------------------------------------------------------------------

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Comments (34)

Gamestop's management is questionable and not that competent and I don't see their revenue growing. On the other hand, they have almost zero competition in terms of brick and mortar video game stores, and I think no matter how popular digital downloads get a large fraction of people will want physical copies of games. Sure, you can order those from Amazon and wait for delivery, but that's not exactly the instant gratification you can get from a brick and mortar store.
BeCall profile picture
Yes, they just showed their financial / share price incompetence by announcing $300M in stock buybacks, while also maintaining the dividend. They should be doing the opposite, so they can fund a transformation. Dumb and dumber, IMHO, and the share price didn't budge, which means Wall Street was not impressed. And they can't find a CEO? Or don't think they need one?
I am not a gamer at all but it seems to me that the gamers like to go to their stores and visit. Look at the stuff, talk to the clerks, talks to other customers. You can't do that on Amazon. A gamer can go on a business trip and drop in a store and check it out and feel at home. Like Starbucks or Barnes and Noble. So GS has a special niche. Not growing too much but not dropping dead.
"I am not a gamer at all but it seems to me that the gamers like to go to their stores and visit. Look at the stuff, talk to the clerks, talks to other customers. "

That is why one store in Australia has a policy that it costs $5 to enter the store, and you get a $5 credit towards a purchase. No free browsing without buying.
Shangrila Value profile picture
I agree, but unfortunately you need attach numbers to personal feeling statements :)
ced1106 profile picture
Everything you need to know about Gamestop's online store can be found on reddit. (:

"Sounds like a good deal until you go look at their website and out of the twenty or so things you're interested in only one is in stock online and two are in stock in two different "nearby" stores that are over an hour away. I really don't know what I expected though, it is Gamestop." www.reddit.com/...

"Before anyone wastes their time, all of the good games are unavailable. This happens every time with Gamestop and it's nothing but time wasted every time. Nothing is ever available. Maybe at the first 20 minutes it's up, but it never lasts long.

"I realize tabletop is not their main business, and these are extremely cheap clearance items, so beggars can't be choosers, but if this is the retail experience I can expect buying board games from Gamestop, then I'd rather just ignore them.
Equanimity Investing profile picture
Or just walk into a store? There are shoppers, hence the $9 billion in annual sales. It's a dying business, and probably mediocre at best, but people still want their product.
@ced1106 I've been saying this for a while now. They are failing massively in their execution and customer service. One only needs to check their social media to see how hated they are by some of their customers.
All retailers have some people who hate them.
pat45 profile picture
FNKO has half the market valuation of GME and their sales of collectibles is less than what GME sells, and that is FNKO 's only business... but a miniscule part of GME sales.
FNKO is still growing their earnings. It looks like FNKO is mostly a distributor, although they do sell directly over the net and at some comic book shows and conventions. It seems like FNKO doesn't have retail stores. Those are a huge expense.

"As I calculated, the company didn't sell because they had about 1.5 Billions dollars in cash after the end of holiday session and sell of mobile stores,
they can't sell a company with 1,5 Billions dollars in cash for lower price of this."

Once they pay the accounts payable for the holiday merchandise, their cash will be much less.
What matters though is net cash, cash minus debt. I have seen stocks selling for less than net cash when they weren't wanted.
assaf hason profile picture
As I calculated, the company didn't sell because they had about 1.5 Billions dollars in cash after the end of holiday session and sell of mobile stores,
they can't sell a company with 1,5 Billions dollars in cash for lower price of this.
and the managers understand they can get for Gamestop extremely more.
currently GME value can be estimate at minimum of $2 Billions, while the market price it at only $1.15B. therefore managers waiting the share price will rise up higher than $20 before they continue to look for a buyer for the company.
Where were all of these bear articles when the stock was at $15 on buyout rumors?
Yanni Lodato profile picture
As we now know, the buyout rumors were misplaced market optimism. Given that private equity firms were dissuaded in a buyout due to interest rates and GME's significant long term debt, there is little remaining source of optimism. GME has an outdated core business, no clear turnaround strategy, and the company lacks an effective CEO. GME is facing a slow but progressive decline. As for GME's stock price: "In the short term the market is like a voting machine, but in the long run it is a weighing machine"
AvgWeirdo profile picture
Despite what some say, price is important! $GME has been ranging from $12 to $16 for over a year now. Anybody buying in at $15 should have been well aware of the risks.
FitInvesting profile picture
As I stated in a previous comment, the facts you presented in your article regarding their cash position were at best, a massive oversight on your part, or at worst a deliberate attempt to mislead. Now, you not only ignore my earlier comment, but again make a terribly misleading statement about their long term debt. After selling the Spring Mobile division, they are now in a net cash position. In fact, they can completely pay the off the “significant long term debt” as you say, and still hold a sizable cash position. Shorting a stock is fine. Blatant misrepresentation about a company to try and drive their price down is not what I expected on Seeking Alpha. Guess I was naive.
This is playing out like one of the possibilities I considered a few months ago. I said that if there is a deal for just part of the company the shorts will likely push the stock under $10. Imo it will be under $10 soon. Will it be a buy if it gets to $8? Perhaps for a trade back to $9.50 or $10.
Timothy Stabosz profile picture
Bad title: Circling the drain implies it is “about to go under.” That is clearly not the case. I bought back in for a trade at $11.25, and will average down on any decline. This is a wonderful cigar butt, high-end Cuban.
Shangrila Value profile picture
It's still a declining business with cash flows that would be hard to predict as the business keeps falling down the slope.
BeCall profile picture
Interested in a trade, waiting for dividend cut... will be another big leg down if that happens.
Equanimity Investing profile picture
I pray that happens, would be the easiest money ever made.
BeCall profile picture
I agree! I'll be in like Flynn with a dividend cut.
GME didn't sell because they didn't get the price they wanted or the interest rate for the buyers was too high.

The truth is it won't take much for the right team to take GME to 30.00 a share.

There are other options as well. Do a leveraged buy out take it private. See a major investor buy over 10%. Have an Amazon or Google buy it for the footprint.

I'm long right now on 3,000 shares.
No mention of the $770 million cash received from the Spring Mobile sale. Kind of changes the debt-equity slam...
Correction: debt-cash slam...
Another expert on GME with no holdings.
FitInvesting profile picture
“It seems that cutting the dividend is a fiscally responsible course of action given that GME's annual dividend payments monopolize a substantial portion of free cash flow, the company has a large debt accumulation of $818 million with a significant $350 million debt payment due this year with limited cash reserves of $455 million”

This statement hurts the credibility of your entire article. You might want to take a look at the large asset sale they just closed on and revise your remark about “limited” cash reserves. Now what the BOD or future CEO does with their LARGE cash reserves remains to be seen. That will most likely determine the fate of this stock, at least in the short term.
Deep Value Ideas profile picture
Indeed, not a very well researched article. The dividend is definitely not unsustainable and the yield is just a function of the steep decline in share price. In the end, GME must have done something right since revenues remained flat with rather stable margins where other retailers struggle from revenue declines and substantial margin compression. If you believe in your story of GME going under, go on and short it.
The yield will keep a good floor on pricing and they have a good amount of dry powder to work with. The BOD sees a value that they could not obtain through buyout so my expectation is they will execute a strategy to get the valuation to an 18-20/ share within the coming quarters. It is hope.... not always the best investment strategy. Good luck to all. Long this for now
AvgWeirdo profile picture
I believe you are right, and that is exactly why I decided to take a small position in $GME when it dropped nearly 30%. More than likely its demise will be slow and I expect it to flop about like a fish out of water for while. Sure, I know I'm gambling here, but I think a buck or two can be made buying dips and selling bounces as it flounders about.
pdunc profile picture
No, you're right. I bought 2k at 11.08 and sold at 11.40 and will look for that one again while it tests these lows for a base.
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