GameStop 4Q20 Earnings Analysis


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


600 views0 comments

Recent Posts

See All