Most arguments in favor of buying GameStop (GME 7.58%) center around the power of its meme stock status. It remains one of the most discussed stocks online, and because meme stock prices are often driven by social media chatter rather than business fundamentals, its top-of-mind position with investors makes the stock appealing to many.
Yet I still subscribe to the notion an investment needs to be based on something less transitory than whether a stock is popular on Reddit. Stocks remain the greatest wealth creation vehicle available, so buying and holding good companies for many years, decades even, is the best strategy for investing.
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And though I've been critical of GameStop, I do think a case can be made for the video game retailer to be a part of an investor's portfolio.
Below are the three top reasons why I think GameStop can be a buy, and one big red flag for why you ought to sell.
Buy reason No. 1: Brand value
Say what you want about GameStop surviving in an increasingly digital gaming world, but the video game shop is still synonymous with the gaming community and retains invaluable brand recognition.
That became evident during the lockdown phase of the pandemic when gamers immediately turned to GameStop's website as a place to buy gaming gear, paraphernalia, and games themselves. Transitioning to a more online-oriented focus won't be smooth for a retailer still very much rooted in the brick-and-mortar world, but it's also immersing itself in the digital sphere.
GameStop has said in financial filings, "We are evolving from a video game retailer to a technology company that connects customers with games, entertainment, and a wide assortment of products," and that's why I think it's not just trying to become the Amazon of gaming, as Chairman Ryan Cohen notably declared but also the "Best Buy of gaming."
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Buy reason No. 2: Embracing gaming's future
Its recent launch of a non-fungible token (NFT) wallet that will enable transactions on GameStop's coming NFT marketplace is an indication Cohen is fully intent on making GameStop the go-to destination for where gaming is heading.
Blockchain gaming grew 2,000% last year to $4 billion, according to DappRadar and Blockchain Game Alliance. But in just the first quarter this year, spending in this space hit $2.5 billion.
GameStop's marketplace could become an important destination for gamers to purchase items for the in-game worlds they're building. The GameStop Wallet is a "self-custodial Ethereum wallet," meaning the funds are controlled by a user alone and can be accessed without leaving a web browser.
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Buy reason No. 3: A clean balance sheet
GameStop's first-quarter report wasn't what many had hoped with wider-than-expected losses, though for a company transitioning to a future growth stock from a decaying business, it should probably be expected. A lot of investment still needs to go into infrastructure, capacity, technology, and personnel to make the transformation.
Net sales increased 8% to just under $1.4 billion compared to approximately $1.3 billion last year, but sales are also well above the $1 billion it generated in the same period in 2019.
GameStop smartly used its meme stock status to pay off virtually all of its debt and had just $42 million left at the end of the first quarter but $1.0 billion in cash, meaning GameStop actually has the financial wherewithal to achieve its goals.
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The No. 1 reason to sell: A weak business with an overvalued stock
Forget about GameStop's meme stock status, that it's splitting its stock, or even the theory that short sellers and other dark, nefarious forces are plotting against the video game retailer to take it down.
Other than the hints at what is to come like the NFT business, GameStop has been fairly tight-lipped about how it's going to achieve its transformational goals, which makes it difficult to assess its business.
NPD Group says video game industry spending fell 8% in the first quarter with accessories down 16%, hardware falling 15%, and games off 7%. Even the console upgrade cycle may not be enough as supply-chain constraints are affecting availability, as reflected in the worse-than-expected losses when GameStop reported earnings last week. For a company trying to focus on the digital world, it must also grapple with consumer spending on mobile games declining 10% from last year.
GameStop reported a loss in the holiday season, its biggest quarter of the year. For the first quarter, GameStop experienced a rapid increase in its cash burn rate as it developed the NFT wallet and marketplace. Yet there was no mention once again of how it hopes to ever make money or what competitive advantages it possesses to help it overcome the structural changes underway in its industry.
That dispiriting outlook, juxtaposed against the video game retailer's still-elevated stock price, suggests GameStop remains wildly overvalued.
