Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of GameStop Jumped Today

By Timothy Green – Apr 13, 2020 at 1:29PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A major investor boosted his stake in the struggling retailer.

What happened

Shares of video game retailer GameStop (GME -1.52%) jumped on Monday after Scion Asset Management reported additional stock purchases in a filing with the Securities and Exchange Commission. The investment firm, founded and run by Michael Burry, now has a 5.3% stake in the company. GameStop stock was up about 14.3% at 12:40 p.m. EDT today.

So what

Burry first revealed a significant stake in GameStop back in August, arguing that the balance sheet was in good shape and that the retailer's cash flow justifies a much higher share price. Burry also argued for a massive share buyback program, given the beaten-down stock price.

A rising chart.

Image source: Getty Images.

GameStop has spent heavily on share buybacks, using $199 million in fiscal 2019 to buy back 38.1 million shares. The company has also been paying down its debt. It ended fiscal 2019 with about $500 million in cash and $420 million of long-term debt.

While the balance sheet looks fine for now, that may not be the case for long. Even before the coronavirus pandemic forced the shutdown of many retail stores, including GameStop's, the company was struggling. Comparable-store sales were down a whopping 26.1% in the fourth quarter, reflecting weak demand for current-generation game consoles.

Burry apparently still sees value in GameStop, despite the terrible results and a very rough road ahead because of the pandemic.

Now what

The pandemic could hasten the transition from physical game discs to digital downloads, as well as the deterioration of GameStop's used-games business. Used games are a cash cow for the company, but sales have been in decline since 2016. As more gamers opt for digital downloads, it's hard to imagine any kind of recovery.

New game consoles are expected to launch later this year, which will likely give GameStop a sales boost. But the company makes very little money selling new hardware, and it's unclear what demand will look like if the U.S. is still in a recession when the holiday season rolls around.

GameStop's balance sheet buys it some time. But the chances of a comeback, given all the headwinds facing the business, don't look great.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$25.99 (-1.52%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
338%
 
S&P 500 Returns
108%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.