Those looking to invest in stocks are advised to examine the fundamentals of the business, including profits, revenues, and earnings ratios, among other metrics. The basic idea is to develop a good understanding of whether management has steered the firm onto a positive trajectory, both currently and in the future.
With its shares soaring over 90% in the past three months, one would think that GameStop’s (NYSE:GME) business is going gangbusters at the moment.
Well, not so much, writes investor Lipper Alpha Insight, who points out that “GameStop’s actual business – selling video games and associated paraphernalia – isn’t doing so hot.”
Indeed, sales of its hardware, software, and accessories were down around 30% in 1Q24. And yet, GameStop did come close to breaking even, bolstered by its alternative revenue stream – “earning interest on cash that was handed over irrationally.”
Unfortunately for those hoping for sustainable, long-term growth, GameStop has not taken advantage of the cash bonanza to right the sinking ship, claims Lipper Alpha.
“While GameStop has tried to get its finances in order, the cash hasn’t been used to change its business meaningfully,” the investor opined.
That being said, the company’s shrewd selling of additional shares in the past two months has provided the company with some $3 billion in breathing room.
“That growing cash hoard represents quite a lifeline,” writes the investor. “Assuming the company continues its last quarter’s operating cash burn rate, its war chest won’t be depleted for another 10 years.”
But make no mistake, says Lipper Alpha, GameStop is a “company with a dying core business.”
Perhaps, posits the investor, it is better to think of GameStop as if it were a bank, taking in deposits and earning income that surpasses what its investors are seeking.
But, there’s a catch. “Unlike at a real bank, shareholders are unlikely to ever get their money back,” warns Lipper Alpha. “Shareholders would be better off sticking with an actual savings account.”
To this end, Lipper Alpha is encouraging investors to stay away from GameStop shares. (To watch Lipper Alpha Insights track record, click here)
A look at Wall Street does not inspire much confidence either. GME stock’s Moderate Sell consensus rating is based on just one Sell recommendation, accompanied by a 12-month price target of $11.00, which implies a potential decrease in value of ~58% from current levels. (See GameStop stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
Barbara Terrio is a seasoned business journalist, delving into the world of finance, startups, and entrepreneurship. With a knack for demystifying complex economic trends, she helps readers navigate the business landscape. Outside of her reporting, Barbara is an advocate for financial literacy and enjoys mentoring aspiring entrepreneurs.
