Is GameStop (NYSE:GME) Actually Worth Investing In?

I’m embarrassed to say I never gave GameStop (GME) stock a second look when Roaring Kitty sent the stock surging on two occasions earlier this year. However, on closer inspection, there’s more to the company than I had expected. It’s sitting on strong cash reserves and has very little long-term debt. Nonetheless, I’m bearish because the valuation is simply stretched, given the company’s earnings potential. Moreover, I can’t see a significant turnaround on the horizon.

GameStop and Roaring Kitty

Let’s start by reminding ourselves why GameStop stock is so well known. The video game retailer, headquartered in Grapevine, Texas, became a global phenomenon during the 2021 short squeeze. Retail investors on Reddit, inspired by “Roaring Kitty” (Keith Gill), drove the stock price from $17.25 to over $500, challenging Wall Street hedge funds.

At the time, the company was struggling with declining physical game sales while the pandemic shifted the firm’s sales online — for the full year 2020, the average share of online sales stood at 30%, compared to 5% in 2019. Nonetheless, it remained a business in trouble, suffering from slowing foot traffic, increasing competition from digital game downloads, and an overall shift in consumer behavior away from physical media.

GameStop Has Benefitted from the Meme Trade

Since 2021, GameStop has indeed benefited significantly from the meme stock phenomenon, primarily through increased interest from retail investors and a substantial cash infusion.

The surge in its stock price allowed the company to capitalize on its newfound popularity, raising over $1.1 billion through a stock offering in June 2021, followed by another $400 million in September 2023. This influx of capital boosted GameStop’s cash reserves to approximately $4.2 billion by July 31, 2024, marking a 251.9% increase year-over-year.

Additionally, the company used some of these funds to pay down its long-term debt, which was reduced to just $17.7 million as of February 3, 2024. Consequently, it’s fair to say that GameStop is a company with sound financials. With a net cash position of $3.86 billion, the firm could theoretically generate more than $100 million annually in net interest income. However, I remain bearish because the company’s earnings forecast really isn’t very strong, and the business continues to bounce around its breakeven point.

Valuation Remains Stretched

Adding to my negative outlook is GME’s stretched valuation. The stock is currently trading at 212x its trailing 12-month (TTM) earnings and 529x forward earnings. This forward metric is a 2,608% premium to the consumer discretionary sector average. Moreover, the earnings forecast is very sketchy, with no clear improvements in earnings throughout the medium term.

Even taking into account the company’s cash reserves, the business looks expensive. On a TTM basis, the stock’s EV-to-EBITDA ratio is 172x — that’s a…