GameStop is down 70% from record highs but remains a high-risk bet for investors given its negative profit margins and falling revenue.
Jan. 20, 2022
One of the most traded stocks in the last year, GameStop (NYSE: GME), has taken investors on a roller-coaster ride. Shares of GameStop were trading at less than $3 in April 2020 and soared to a record high of $325 in January 2021. GME stock is currently trading at $106.57, valuing the company at a market cap of $8.13 billion.
GameStop was a favorite among retail traders on Reddit who successfully orchestrated several short-squeezes since the start of 2021. But let's take a look to see if investing in GME stock is a fundamentally sound decision right now.
The bull case for GameStop stock
GameStop sales fell from $9.2 billion in fiscal 2018 to $5.08 billion in fiscal 2021, ended in January. However, in the last 12-months, the company has increased sales to $5.87 billion, while Wall Street expects the top-line to increase by 17.3% to $5.97 billion in fiscal 2022.
In Q3 of fiscal 2022, GameStop sales were up a healthy 30% year over year at $1.29 billion.
In addition to improving sales, GameStop recently disclosed it's entering the NFT or non-fungible token segment. NFTs are digital ownership certificates for intellectual properties such as videos, art, and even gaming products. According to a report from Bloomberg, the NFT market grew to $41 billion in 2021, while OpenSea, which is a leading player in this space, is valued at $13 billion.
Similar to OpenSea, GameStop will also operate an NFT marketplace, and entry into this high-growth vertical may be a key driver of revenue growth for the company going forward.
The bear case for GameStop stock
GameStop is a video-game retailer that has been wrestling with negative profit margins and slowing sales. In the last three quarters, the company reported a net loss of $234 million, compared to a loss of $296 million in the year-ago period. Its operating cash flow also stands at a negative $324 million in fiscal 2022.
Like most other retailers, GameStop was negatively impacted amid COVID-19 due to economic shutdowns. However, even before the pandemic, GameStop struggled to expand sales due to the worldwide shift towards digital gaming solutions. Further, GME's sales are forecast to fall by 1.2% to $5.9 billion in fiscal 2023.
In addition to its less-than-impressive financial metrics, the astonishing run of GME stock in the past year has made it expensive, given it was trading at less than $20 at the end of 2020.
So, should I buy GameStop stock?
Despite the recent uptick in sales, GameStop stock remains a high-risk bet. Launching an NFT marketplace might seem ground-breaking, but it might also be a virtual craze that fizzles out quickly.
GME stock will have to increase its high-margin e-commerce sales in the upcoming quarters and turn profitable to gain investor confidence. Analysts tracking GME stock also expect it to fall by over 30% in the next 12-months.
Frequently asked questions
Why is everyone buying GameStop stock?
GameStop has gained popularity as a meme stock in the past year.
Is GameStop stock profitable?
No, GameStop reported an operating loss in the last three quarters.
What is the market cap of GameStop?
GME stock is valued at a market cap of $8.13 billion.
