Consistent with its recent pattern, GameStop Corp. (NYSE: GME) reported disappointing quarterly earnings on June 1 after the regular market close. Specifically, the company recorded US$1.38 billion of revenue and an operating cash flow deficit of US$304 million in the quarter ended April 30, 2022. These results bring its operating cash flow loss for the twelve months ended April 30, 2022 to US$719 million.
Another template for GameStop shares persisted in after-hours trading: despite management again refusing to provide any future outlook or guidance, or to take any questions on its earnings conference call, the stock continues to trade at a price untethered to any valuation metric.
For example, its adjusted EBITDA over the last twelve months is a US$362 million deficit, a shortfall which widens each quarter, yet investors assign an enterprise value to the company of nearly US$9 billion.
| (in millions of US dollars, except for shares outstanding) | Twelve Months Ended April 30, 2022 | 1Q FY23 | 4Q FY22 | 3Q FY22 | 2Q FY22 |
| Revenue | $6,112.3 | $1,378.4 | $2,253.9 | $1,296.6 | $1,183.4 |
| Adjusted EBITDA | ($361.7) | ($125.5) | ($126.9) | ($79.8) | ($29.5) |
| Adjusted Operating Income | ($468.7) | ($153.7) | ($160.7) | ($102.9) | ($51.4) |
| Adjusted Diluted EPS | ($6.1) | ($2.08) | ($1.86) | ($1.39) | ($0.76) |
| Operating Cash Flow | ($719.4) | ($303.9) | ($110.3) | ($293.7) | ($11.5) |
| Cash – Period End | $1,035.0 | $1,035.0 | $1,271.4 | $1,413.0 | $1,720.4 |
| Debt – Period End | $617.0 | $617.0 | $649.0 | $667.8 | $701.0 |
| Fully Diluted Shares Outstanding (Millions) | 75.9 | 75.9 | 75.9 | 75.9 | 72.6 |
In its prepared remarks on its conference call, GameStop management re-emphasized plans to invest in the cryptocurrency and non-fungible token (NFT) areas. The flaw in this argument, at least with regard to GameStop’s valuation, is that investors’ affection for these businesses has fallen dramatically. For example, Coinbase Global, Inc. (NASDAQ: COIN) fell 12% on June 1 and has lost 80% of its market capitalization in just over seven months.
Also, according to the data website NonFungible, the sale of NFTs has fallen to around 19,000 per week, down from a rate of 225,000 nine months ago. Moreover, the number of active NFT trading wallets has declined to about 14,000 from 119,000 in November 2021. Even if GameStop can succeed in establishing an NFT marketplace, these statistics certainly call into question whether this can be a money-making venture.
GameStop’s cash burn rate (defined as negative operating cash flow plus capital expenditures) in the April 2022 quarter was nearly US$315 million. The company’s cash fell to US$1.035 billion as of April 30, 2022, from US$1.27 billion on January 31, 2022. The cash balance did not fall as much as implied by the quarter’s cash burn rate because GameStop sold US$77 million of digital assets in the quarter.
GameStop’s cash needs could prompt a stock issuance at some point in 2022. Given the erratic trading history of this stock over the last 17 months, it is not clear if such an announcement would be greeted warmly or poorly by investors.
One of the original predicates for investing in GameStop in early 2021, a potential squeeze which would force short covering at almost any price, seems not to be in place today. As of mid-May 2022, only about 17% of GameStop’s outstanding shares and 23% of its float have been sold short, far less than early 2021 figures of 100% or more.
As is the case with many high valuation stocks, GameStop has lost around half its market value since November 2021. While perhaps tempting to think this decline has created an opportunity for speculative investors, the significant uncertainties surrounding the company, in addition to a still sky-high valuation, argue otherwise.
GameStop Corp. last traded at US$133.70 on the NYSE.
Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
