GameStop (NYSE: GME) is an Attractive Risk-Reward Ahead of Earnings

GameStop NYSE: GME is set to release its Q3 earnings today after the bell, and you’ve probably heard the company’s critics over the past few years. Many of them say, “GameStop is the Blockbuster of video games.”

Now, I’m not going to sit here and say that GameStop is without its flaws. To name a few:

• CEO George Sherman hasn’t fully embraced the digital shift taking place in the gaming world (everywhere?).
• Sales have been dropping in 2020: 34.2% yoy in Q1 and 27% yoy in Q2. Sales are projected to decrease 24% yoy in Q3.
• The company lost $111.3 million in Q2, and losses have become the norm of late.

GameStop Broke Out to 52-Week Highs Last Week

Considering all the struggles, you may be shocked to hear that GameStop surged to 52-week highs early last week.

That’s little consolation for anyone who bought GME 13 years ago for $60+ a share, but if you bought GME in the summer of 2020, you’re sitting pretty.

The move could seem shocking – or even nonsensical – at first glance. But it isn’t.

Investors got overly pessimistic on GameStop for a while. But now they’re coming to the realization that things aren’t as bad as they look.

Not All Doom and Gloom

 It’s tempting to think of GameStop as a pure brick-and-mortar retailer that is getting mowed down by online retailers. But that’s far from the truth.

GameStop’s e-commerce sales grew 800% in Q2, following a 500% gain in Q1. And it’s not as if online sales grew from, say, $1 million to $8 million. On the Q2 call, management said that GameStop’s e-commerce business should cross the $1 billion mark in 2020.

Then there’s the investment made by Chewy NYSE: CHWY co-founder Ryan Cohen. Back in August, Cohen revealed a 9% stake in GameStop. Chewy has made its name as an e-commerce leader in the pet industry.

Cohen is one of the best people imaginable to push GameStop into the 21^st century. He is, unsurprisingly, pushing GameStop to build a better e-commerce platform that takes advantage of shifts to live-steaming and esports. Cohen also wants GameStop to close underperforming stores.

Is Management Receptive to Cohen’s Advice?

 There’s little question that Cohen is right on the money. But is GameStop’s management taking proper action?

Yes and no.

GameStop is closing down underperforming stores, with worldwide stores down 10% yoy as of the end of Q2.

On the other hand, there was an alarming quote from CEO George Sherman on the Q2 earnings call, as he was in the midst of defending the future of physical games:

“Consumers like the physical aspects of games. They collect them and they add value as a trade in. So as software continues to evolve with dramatically better graphics, it does not take up valuable storage space and disks are available to those without broadband Internet.”

I see where he’s coming from… But ouch. This sounds like something Blockbuster would have said before Netflix NASDAQ: NFLX obliterated it.

New Xbox and PlayStation Should Give GameStop Q4 Boost… But Then What?

Microsoft NASDAQ: MSFT and Sony NYSE: SNE both released new video game consoles in November, the first time that the two companies came out with consoles at the same time since 2013.

The good news is that, despite the shift to digital downloads, the new consoles accommodate physical discs.

The bad news is that the 2013 releases gave GameStop a boost, but it proved unsustainable.

All that said, GameStop surged above $50 a share back in November 2013. Shares are a fraction of that price today, so there is a lot of upside before they get anywhere close to those levels.

How Do You Play GameStop?

I’m no raging bull on GameStop. This company certainly has its warts and some of them aren’t going away.

But as I said in the headline, I like the risk-reward.

GameStop has a market-cap of a little over $1 billion – really low for a company with such a strong brand and customer base.

I’m not a fan of Sherman, but there’s a chance that Cohen can make him see reason. And if not, it’s possible that the board can remove him.

Bottom line: I wouldn’t bet the house on GameStop, but it’s worth picking up some shares ahead of earnings. If a turnaround comes to fruition, a small position can pay off handsomely.