GameStop Valuation GameStop (GME) is labelled as a growth stock with an inverse price to growth relationship.
Growth however, is highly subjective and claiming GameStop is stagnant or declining may be short selling (pun intended) their potential.
In fact, a potential pivot is likely, and speculation in the space has already given tailwind to GameStop becoming a strong participant in the esports industry. They are doing so however, in a physical rather than digital manner. GameStop has begun to develop infrastructure that will serve as esports facilities. Seemingly refuting a potentially strictly digital esports environment.
GameStop has experienced a revenue decline of ~18% annually. This is sometimes overshadowed by the drastic increase in e-commerce sales. Just during the 2020 holiday period ecomm sales displayed a 300% increase YoY. Mostly attributed to the sale of gaming consoles, which are released only once every 4 years. The short term injection in ecomm sales will dwindle as demand for highly limited consoles reverts to its mean.
GameStop currently has a diminishing quick ratio. The company has historically maintained a quick ratio below 1 often at levels as low as .6. GME earnings projections range greatly and worse than expected earnings may impact their ability to pay back current liabilities. This coupled with the slimmer margins that come with online sales, due to transaction fees, would require that GME cut back on borrowing.
Gross margins have been decreasing at a rate of ~4% YoY for GME. This is because of the aforementioned slimmer margins that come with online transactions, which GME has relied on for growth.
GME has reiterated their intention to spend money on improvement of their ecomm sales. Many analysts have supported this claim with the belief that GME’s leases will expire and new capital will be geared towards improved ecomm and esports facilities. The converse is true. GME has increased leased stores at the same rate from 2018-2020. The number of leases expiring in 2022 has increased 50% from 2018 reflecting rented space. While simultaneously in-store sales have declined.
GameStop current projected earnings for 2021 demonstrate a decline of ~200% from fy2019 to fy2021.
There is a caveat in the potential swing of these earnings with high deviations in estimates. If aligning expected EPS with historical (2018-2020) PE ratio (~45) and using trends in ecomm sales and store sales an estimate can be made for a long term market cap.
In 2017, 2018, and 2019, total annual earnings were approximately 1% of total annual revenue. If accounting for an increase in ecomm sales, slowing down total revenue decline one can assume total revenue of ~$4,500,000,000. If earnings continue at the trend of 2% of this revenue, total earnings would be ~45,000,000. This would reflect EPS of $.63. Using the historical PE ratio of 45x, expected market cap would be $2,000,000,000, or a per share price of $28.35. However, as mentioned previously, analysts expect an extreme range of potential earnings for fy2021.
If monetary stimulus, augmented reality advancements, new video games releasing for new consoles, the increased popularity of esports, stores reopening, overall consumer sentiment and confidence, prevail simultaneously, causing revenue to increase this projection would be an understatement. If assuming revenue of $6,000,000,000 and earnings margins of .02 total market cap, based on a 50x PE ratio would be $6,900,000,000, or $84.74 per share.
Comparable companies in the short term are other online/brick and mortar video game retailers. Best Buy is a potential example. Video game sales made up 3% of total revenue. If stripping all other sectors sold by Best Buy and assuming the same margins for all goods sold, Best Buys market cap would be ~$200,000,000.
Recently converging simple moving averages are thought of as a potentially upwards trending signal. This recently occurred for GME and has led to an influx of bullish options purchases and sales.
GameStop Valuation Written by Hakil Haxhiu