Catalysts:
Catalysts for investment changed since I first started investing in GameStop in September 2019
GameStop no longer qualifies as a value stock
Ryan Cohen and two other former Chewy executives joining the board of GameStop expected to change the business, starting with a new Chairman in June.
Hired COO Jenna Owens with Chief Customer Officer Frank Hamlin to leave the company.
No concrete plan yet on how transformation will happen to take company online
Closed 693 stores in 2020
Total shares outstanding short now at 20.3% with 52% of float - minor short squeeze still possible
Risks:
Now highly speculative stock
Losing market share with sales of hardware down in 2020 despite the new beginning of a new console cycle
High competition with Amazon, Walmart, Best Buy, Target and console makers
This may be the last console cycle as cloud gaming is gaining popularity
Cyclical stock
Financial Analysis:
Revenues of $2.12 billion in 4Q20 vs $2.19 in 4Q19
Revenues of $5.0 billion in FY20 vs $6.4 billion in FY19
SG&A cost of $1.5 billion in FY20 (29.7% of revenues) vs $1.9 billion in FY19 (29.8% of revenues)
Net income of $80.5 million in 4Q20 vs net income of $21.0 million in 4Q19
Net loss of $215 million in FY20 vs net loss of $470 million for FY19
FCF of $63.7 million for FY20 vs negative FCF of $492 million for FY19
Global ecommerce sales increased by 175% in FY20 and now 34% of total sales
6.5% increase in Comparable Store sales in 4Q20 vs 4Q19
Comparable Store Sales down 9% for FY20
Balance Sheet
Total assets: $2.47 billion ; total liabilities: $2.03 billion; book value: $436 million
Cash: $508 million, debts: $337 million, current assets: $1.55 billion, current liabilities: $1.34 billion
Valuations
My personal Biases
GameStop used to be the largest position in my portfolio before selling for a 3300% average profit
More likely to be a pump and dump stock
I believe that Ryan Cohen is smart and has the vision to change GameStop
Hard to value impact of Ryan Cohen without him presenting a clear plan
Assumptions
Estimated $300 million in FCF in 2021
2022-2026 crucial years for GameStop with Ryan Cohen’s activism
More exposure to e-commerce → higher margins
Number of stores from 5000 to 2000 by 2026
Lower revenues but better margin with SG&A costs lowered to $1 billion a year by 2026 from current $1.6 billion
FCF of $200/year in 2022-2026 discounted at 15%
Bear Case
Changes prove to be too costly and fail. GameStop remains physical gaming retailer with failing business
Revenues of $3 billion in 2026
FCF margin of 6%
$200 million in FCF
No future growth
Base Case
Revenues of $3.5 billion in 2026
FCF Margin of 9%
$315 million in FCF
Future Growth of 2% p.a
Bull Case
Revenues of $4 billion in 2026
FCF margin of 12%
$480 million in FCF
Future growth of 5% p.a
GameStop stock worth $50/share in bull case
GameStop trading above its intrinsic value
Conclusion
Business potential still here with fundamentals unchanged from last analysis (January 2021)
Massively overvalued
Correction to be expected eventually
Hold stocks at own risk if you believe in the future of the business
Full Analysis: https://ishfaaqpeerally.teachable.com/courses/ishfaaq-investment-research-partnership/lectures/31348577
