Maybe It’s Time to Buy Some GameStop Stock

Key Points

• GameStop's core business continues to contract, but owning Bitcoin may be a game-changer.
• Although the company's balance sheet is well-capitalized, there is always the risk that it will sell shares if its share price increases. 
• Another meme-driven frenzy is unlikely, with short-interest trending lower and near a multiyear low in March 2025.

While GameStop NYSE: GME faces many challenges and has a long road to recovery, it may be time to consider a position.

The core business suffers and contracts, but the cash balance has proven sufficient to produce profitability, and now we know what CEO Ryan Cohen wants to do with it.

The news is that GameStop’s board unanimously approved the decision to allow Bitcoin as a reserve asset.

This means the company can start building a Bitcoin reserve and potentially transform into a Bitcoin bank, following in the footsteps of MicroStrategy NASDAQ: MSTR. 

GameStop’s Business Contraction Won’t Stop

GameStop had a rough Q4, with its topline contraction accelerated by the winding down of European-based operations. The company reported $1.28 billion in net revenue, $0.200 or 1350 bps below the consensus, down 28.5% compared to more minor contractions in the previous quarter and year.

Segmentally, software sales were weakest, down by 38.5%, followed by Hardware by 33.6%. The Collectibles segment was an area of strength, rising by 15.6%, but it remains down in the two and three-year stacks and a small portion of revenue, insufficient to offset the core weakness. 

The margin news is OK. The company has worked hard to reduce its retail footprint and operating costs, as shown in the results. The company’s typical holiday-period profits were better than expected but grew despite the top-line weakness. Add in the interest income from the $4.775 billion in cash on the balance sheet, and the $0.30 in adjusted earnings is $0.22 better than forecast by analysts.

The problem is that business will likely continue to decline, and the least profitable quarters of the year lie ahead. GameStop did not give any guidance. 

GameStop Has the Capital, But It Came at a Cost

GameStop’s balance sheet reflects its efforts to improve its business and operational performance. The company’s assets are up on the cash build, but this is offset by the reduced operating footprint and cash flow improvement it brings. The only problem is that the cash build came at a cost, and that is shareholder value.

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The company’s shareholder equity is up 250%, offset by a 46% year-over-year increase in the share count. The company has not revealed a plan to sell more shares, but there is always the risk that it will if the share price rises significantly. 

The analysts were not impressed by GameStop’s news. As it is, the single analyst with coverage remains Wedbush with a rating of Sell and a $10 price target. That is more than 60% below the post-release closing price and still in play, given the valuation.

The stock trades over 115x its F2024 earnings with no growth expected, only business contraction and the dubious impact of Bitcoin investment. Bitcoin is forecasted to trend higher over time but pays no dividends and costs the holder to own and secure it. 

Using Strategy as a Guide

If we use MicroStrategy, which is now doing business as Strategy, as a guide, GameStop’s reported business metrics should stabilize soon. The bad news is that revenue growth is unlikely, and operating profits from interest income will dwindle as the cash is converted to BTC. Eventually, without careful management, GameStop will start to burn capital again, but its Bitcoin stash will grow. 

The Technical Outlook: GameStop Rallies and Could Move Higher

GME’s price action spiked following the BTC announcement and shows support at critical levels, including a cluster of moving averages and prior price action. However, another meme-like run to record highs is unlikely due to the low short interest. GME’s short interest has been in decline since mid-2023 and is at levels unlikely to support a short squeeze.

The more likely scenario is that resistance in the $35 to $40 range, if not lower, will cap gains and keep this stock range-bound until more news is available.