Sorry Bears! GameStop Isn't Going Out of Business Anytime Soon

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Feb. 4 2022, Published 8:42 a.m. ET

GameStop stock has plunged in 2022 and trades at a fraction of its 52-week highs. To make things worse, consumers have noticed that GameStop stores have been closing. Many skeptics want to know if GameStop is going out of business.

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It has been over a year since the meme stock mania gripped Wall Street. GameStop and AMC were the two favorite names among WallStreetBets members. For possibly the first time in history, retail traders almost scripted the demise of a multi-billion dollar Wall Street hedge fund.

Why is GameStop stock going down?

Speculative names, including meme stocks, have been out of favor with markets. There also seems to be a sense of disillusionment and disenchantment among retail investors holding meme stocks. These stocks required continued buying support from retail traders amid the lack of buying interest from institutional investors.

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To make things worse, the Fed’s tightening has ended the easy money party that was among the key drivers of the rally in meme stocks. Also, since several high-quality growth names are now available at tempting valuations, investors have pivoted towards them instead of meme stocks like GameStop.

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Finally, GameStop’s valuation was at unjustifiable levels at its peak. Markets got carried away with the business transformation under Ryan Cohen. While the company is working on the transformation, not many details are available on the business strategy.

The abridged earnings call for the last several quarters, where the company hasn’t been taking any analyst questions, hasn’t helped matters either regarding the information flow.

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GameStop has closed several stores.

GameStop has been working on a de-densification strategy. As part of that initiative, the company permanently closed 449 stores between October 2020 and October 2021. GameStop has been strengthening its e-commerce business and a large part of its sales are now online. The company has been trying to transfer customers from closed stores to nearby stores or online for shopping.

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Apart from the permanent store closures, GameStop has had to temporarily shut its stores in some parts of the world due to the lockdown rules. The company intends to close more stores in a bid to lower its fixed cost base and transition towards e-commerce.

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GameStop isn't going out of business anytime soon.

Gaming retail isn't as lucrative a business as it was a decade ago. Gaming has moved online and a lot of people have also been buying gadgets and gaming consoles online. Many bears use this argument to point out that GameStop will go out of business sooner or later.

However, the company realizes the tectonic shift in gaming and has been working on other business lines. Apart from gaming, GameStop is also expanding into selling other consumer electronics and has expanded its partnership with companies like LG, Asus, Samsung, and Logitech. The company has been trying to increase its total addressable market, which will eventually be reflected in its top line as well.

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GameStop doesn't face bankruptcy risk.

GameStop is now a debt-free company and had cash and cash equivalents of $1.4 billion at the end of October 2021. The company used the spike in its stock to raise cash, which has strengthened its balance sheet.

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GameStop is hiring talent and moving to new businesses.

GameStop has been hiring a lot of tech talent. It has also been looking to explore opportunities in NFT, blockchain, and Web 3.0 gaming. A few years from now, GameStop will be a different company than we have been used to seeing it over the years.

Can Cohen create another Chewy by transforming GameStop? It looks likely considering a loyal shareholder base and the focus on tech. To sum it up, while bears might be betting on GameStop's eventual demise, the company is transforming its business to position itself for the future.

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