Four months ago, I said that I wouldn't touch GameStop (GME -12.19%) stock with a 10-foot Energy Sword before the company makes some radical changes to its business model. Since then, GameStop has made many of the changes I was looking for, though that fact has largely been lost in coverage of the ultra-volatile Reddit short-squeeze campaign.
So let's take a closer look at what's new with GameStop. Are the strategy changes deep enough to make me believe in a serious turnaround?
The story so far
To recap, GameStop was up to its knees in alligators a year ago. The company was struggling to keep the lights on, looking forward to the then-upcoming launch of next-generation video game consoles to turn the ebbing tide and save its bacon.
Then, the pandemic struck. GameStop's management argued that video games are essential goods in a time of crisis, playing a desperate gambit to keep store doors open during lockdowns. The company pulled every available lever to protect the existing business plan until the gaming-console cavalry could save the day. The business went from bad to worse, and investors took notice. GameStop's enterprise value dropped all the way to zero at the end of July.
Meanwhile, activist investor Ryan Cohen built a significant ownership stake in GameStop and started pulling strings to change the company's operating model. Specifically, he wanted to let go of the stagnant brick-and-mortar network and refocus on e-commerce plus online services. The most valuable part of the GameStop package, in Cohen's view, was the time-honored brand name and the nationwide community of gamers that it had fostered over the years.
Winds of change
A revamped GameStop with a heavy focus on digital sales and services makes sense. It's not a slam-dunk winner of an idea, but it is a large step in the right direction. The success or failure of this GameStop 2.0 business comes down to making the most of the assets at hand while finding workarounds for pain points like the crumbling store network.
I didn't expect the GameStop leadership team of old to make any of these difficult but necessary moves. Cohen's potentially game-changing ideas would surely be up for a drawn-out battle where every inch of movement toward a more flexible e-commerce business would be won in shareholder votes, boardroom brawls, and press pugilism. Turning the obsolete company inside out would take years, if it was possible in the first place.
But GameStop has turned a corner over the last three months. The company started to kick out high-level executives, replacing them with seasoned e-commerce specialists from online winners such as Cohen's pet-toys retailer Chewy (CHWY -1.55%) and sector leader Amazon (AMZN 1.41%). Their pedigrees are on point and should prove very useful as GameStop explores the e-commerce market in a whole new way.
Ryan Cohen has been tapped to serve as chairman of GameStop's board of directors, giving him a lot of power to push the company in a new direction. Eight of GameStop's 13 board members will not stand for reelection this summer. CFO Jim Bell and CEO George Sherman have been pushed out, and the board is looking for their permanent replacements.
Will it be enough?
Long story short, a wind of change is blowing through the video game retailer's boardroom and executive offices. After the annual shareholder meeting on June 9, we'll be looking at a brand-new company. It has prepared for this momentous event by selling 3.5 million new shares at Reddit-boosted prices, then using the proceeds to pay down its long-term debt balances.
All of this makes sense, and I could imagine becoming a GameStop shareholder as the e-commerce plan takes shape.
But it's still too early. GameStop is trading at 25 times the company's book value and 187 times free cash flows, having gained 1,030% over the last six months. That's too rich for my taste, supported by nothing more than Reddit/WallStreetBets speculation and unproven dreams.
Let Cohen take his chairman's seat and whip up a more-concrete transformation plan, while the Reddit mania fades out and the stock cools down. I'll keep an eye on both the price trend and the strategic overhaul, and we might -- just might -- get to a point where it starts to make sense building a position in this hyper-volatile stock.