GameStop $GME and Microsoft $MSFT entered into a partnership and the stock price of GameStop gained 44% in a single day (it dropped by 10% the following day). We will need to see what this partnership is about. How will this affect the business of GameStop and also to some extend Microsoft and how will this affect the stock price.
First, we need to make something clear, Microsoft did not invest in GameStop.
Any company wants their sales to go up but GameStop revenues have been dropping in recent years. Normally, GameStop would have higher sales during the new console cycles. For example, from 2012 to 2014 new hardware sales went up by 52%. We cannot expect the same thing to happen this time as people are shopping online instead of going to GameStop. Partnering with Microsoft can help GameStop increase their revenues since Microsoft is allowing them to sell XboX All Access package which is available to only Walmart, BestBuy and Target so far.
Profits or Free cash flow are more important than revenues and the free cash flow of GameStop have been declining in recent years as they fail to lower Selling, General and Administrative (SG&A) expenses. GameStop has too many stores which are inefficient. Microsoft is going to provide hardware, software and cloud services which is going to help GameStop efficiency and consequently improve profit margins.
Some people are saying that this is the beginning of the short squeeze. Is it true? GameStop stock trading had to be halted several times on that day due to low liquidity. We will need to wait for the numbers which will only come by end of October, but it seems that this is an indication of the beginning of a short squeeze.
The partnership with Microsoft or even the short squeeze are just bonuses. The reason why I'm bullish on GameStop is because of the fundamentals. GameStop is a cigarbutt stock.
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