GameStop’s Slow Bleed hasn’t changed

While GME is up nearly $4, or 15%, to $30.90 since the company announced it results for the third quarter almost two weeks ago, the most important thing is that the basic story has not changed. Revenue continues to decline and it is bleeding money. However, the bleeding is less and the company has a very solid balance sheet as it sold nearly $3.5 billion in stock this year. Note that the company does not hold a conference call when it publishes its quarterly financial statements.

GameStop’s fiscal year end is late January or early February. Between fiscal 2017 and 2019, revenue ranged from $7.97 to $8.55 billion. However, revenue fell in fiscal 2020 (roughly calendar 2019), even before Covid hit, down 22%. Apart from the financial year 2022, revenue has or is expected to decrease through the financial year 2026 (January 2025). Between the financial year 2019 and the financial year 2025, revenue is expected to fall by 51%.

• Fiscal 2017: $8.0 billion
• Fiscal 2018: $8.5 billion, up 7%
• Fiscal 2019: $8.3 billion, down 3%
• Fiscal 2020: $6.5 billion, down 22% (pre-Covid)
• Fiscal 2021: $5.1 billion, down 21%
• Fiscal 2022: $6.0 billion, up 18%
• Fiscal 2023: $5.9 billion, down 1%
• Fiscal 2024: $5.3 billion, down 11%
• FY 2025: $4.0 billion estimated, down 24%
• FY 2026: $3.8 billion estimated, down 7%

Although GameStop’s annual operating cash flow doesn’t exactly reflect the company’s revenue changes overall, the decline in revenue has caused operating and free cash flows to move from positive to negative.

• Fiscal 2017: Positive $537 million
• Fiscal 2018: Positive $435 million
• Fiscal 2019: Positive $325 million
• Fiscal 2020: Negative $415 million
• Fiscal 2021: Positive $124 million
• Fiscal 2022: Negative $434 million
• Fiscal 2023: Positive $108 million
• Fiscal 2024: Negative $204 million
• 3 Qtrs. Accounts 2024: Negative
• 3 Qtrs. Fiscal 2025: Negative $16.6 million

Its improved operating liquidity in the first nine months of the financial year (negative $16.6 million) compared to the last nine months of the financial year (negative $192.7 million) was driven by:

• $0 net loss vs. $(56) million
• Lower inventories by $159 million
• Higher debt to $73 million

Lower inventories and higher accounts payable can only go on for so long.

Free cash flow is cash flow from operations minus capital expenditure.

• Financial year 2017: Positive 394 million dollars
• Fiscal 2018: Positive $322 million
• Fiscal 2019: Positive $231 million
• Fiscal 2020: Negative $493 million
• Fiscal 2021: Positive $64 million
• Fiscal 2022: Negative $496 million
• Fiscal 2023: Positive $52 million
• Fiscal 2024: Negative $239 million
• 3 Qtrs. Fiscal 2025: Negative $29 million

Significantly strengthened its balance

In 2024, the company sold shares on three different occasions. From May to September, it raised approximately $3.45 billion by selling 140 million shares at an average price of $24.64.

It increased its cash and marketable securities from $1.2 billion at the end of January to over $4.6 billion. The company has virtually no debt at $20.5 million and its net cash to market ratio is 34%. While the company is losing money on a cash flow basis, there is more than enough cash to cover any losses.

Operating and net income are created by interest income

In the fiscal third quarter, GameStop generated $20.8 million and $17.4 million in pretax income and net income, respectively, which translated to $0.04 in EPS vs. expectations of a loss of $(0.03).

But as the company raised about $3.45 billion by selling stock, its interest income in the quarter was $54.2 million, up from $12.9 million a year ago, or an increase of $41.3 million. The operating loss was $33.4 million, compared to a loss of $14.7 million a year ago.

Without the additional interest income, the company’s EPS result would have been a loss of $(0.10), compared to a loss of one penny a year ago.

When interest rates move slightly downward, the benefit of the extra cash should diminish.

Valuation is a bit expensive

GameStop’s valuation is on the expensive side compared to the past three years. With a market cap of $13.5 billion and fiscal 2025 revenue of just over $4 billion, its market cap to revenue ratio is 3.4x.

But at 34% of the market cap in net cash, when you subtract the $4.6 billion, the company’s value to revenue is 2.2x. The previous three years at the end of the financial year market value to revenue ranged from 0.8x to 1.3x

So stocks are expensive, but not extremely expensive.

The chart shows a slightly overbought condition

Relative Strength Index or RSI at 60.25 is on the overbought side.