GME Stock Analysis: GameStop Profits Mean Nothing When Your Business Is Dying

Video game retailer GameStop stock (NYSE:GME) can’t win for losing. Not even its first profit in four quarters could turn the tide of negative sentiment positive. The stock is down 37% in 2024 and has lost its half value over the past 12 months.

The stock sold off sharply after reporting fourth-quarter earnings late last month, wiping out all the gains made in the build up to the release. And it continues dropping in the aftermath. Now another executive is thrown out of the C-suite on his ear as executive chairman Ryan Cohen tightens his control over the video game retailer.

GameStop stock is a slow motion car wreck that continues to spin out of control. It’s a crash that’s been going on for three straight years since its meme stock heydey, but is GME stock at the point where it’s simply too cheap to ignore? Let’s see.

A dwindling business

The first first thing GameStop investors need to do is rid themselves of the notion that price is value. As Warren Buffett once noted, “price is what you pay, value is what you get.” A cheap stock price doesn’t necessarily mean it’s a valuable stock you’re buying. So far, GameStop hasn’t proved to the market that what it offers is worth buying. The question is, can it ever offer investors something of value? 

It’s a hard argument to make. Across all of its segments GameStop sales are falling and they have been for several years. 

Revenue tumbled almost 20% in the fourth quarter to $1.79 billion, and was well below the $2.05 billion Wall Street anticipated. While operating earnings were higher at $55.2 million, a 19% year-over-year gain, GameStop had cut its selling, general and administrative expenses by more than 20%. The $94 million it cut from SG&A more than made up for the $9 million gain in operating profits. It was all driven by firing employees, eliminating consultant costs and limiting its marketing.

GameStop is essentially hunkering down as its business spirals lower.

Clearing the decks

That explains why the video game retailer installed a revolving door in the executive suite. It helps get the management team out of the way. The latest to go was COO Nir Patel who joined GameStop in May 2022.

In a filing with the SEC, the retailer said Patel’s separation was effective immediately and he wouldn’t be replaced. His responsibilities would be assumed by other executives. Last June GameStop fired CEO Mike Furlong and opted not to replace him too. Instead. Chairman Ryan Cohen was made executive chairman and he overseas the company’s day-to-day operations now.

GameStop stock also closed down nearly 300 stores last year, ending 2023 with 4,169 locations. That helps to preserve the retailer’s cash, equivalents and short-term investments that stands at $1.2 billion. It’s notable and positive GameStop has little to no long-term debt, other than a low-interest, unsecured term loan stemming back to the pandemic. That at least gives the video game stock some flexibility. 

How low can it go?

So it is difficult to say GameStop’s stock is done falling. Although shares trade at a fraction of sales it sports a multiple hundreds of times earnings. That’s not necessarily uncommon for newly profitable stocks but it indicates there is an imbalance in the equilibrium between its business and the market.

Wall Street has all but given up on covering the company but those that remain are not hopeful. Wedbush Securities analyst Michael Pachter recently lowered his price target to $6 per share. That’s not unreasonable.

Where the bottom is is anyone’s guess. I’ll hazard it’s somewhere north of the $1 or so it was trading at prior to the meme stock frenzy, but well below its current $11 per share level.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.