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.
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.
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.
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.