GameStop Still Has More Questions Than Answers
GameStop (NYSE:GME) exists in a world of its own. Trading at nearly $200 per share, GME stock is valued at more than 10x what it was priced at to begin the year. And in an interview with The Wall Street Journal, Wedbush Securities analyst Michael Pachter said the price is too high for any institutional investor.
Referring to GameStop’s $14 billion valuation, Pachter quipped, “This is not a dot-com that’s just starting up.” And it’s fair to mention that GameStop was having significant issues long before the pandemic.
Yet there are those that believe GME stock can live up to its lofty price. The reason seems to be Ryan Cohen, who is the company’s largest shareholder and a member of the board.
Cohen is the co-founder of Chewy (NYSE:CHWY). And it’s reasonable to give Cohen a close look. He did position Chewy as a worthy competitor of Amazon (NASDAQ:AMZN). That should count for something.
So for a moment, let’s give Cohen the benefit of the doubt. The broad stroke outline for Cohen’s turnaround plan is as follows:
- Make GameStop a technology company that focuses on ecommerce
- Reshape the leadership
- Form a committee to identify possible innovations
The problem is that when I do, I see a plan that has a lot of unanswered questions.
Fighting to Reclaim Lost Share
The first part of Cohen’s plan is obvious. Gamers aren’t looking to buy physical copies of their games anymore. They just want to download the latest version and be on their way. GameStop was behind the curve on this move. In fact, even at the onset of the pandemic, the company fought to keep stores open as “essential businesses.” They weren’t, at least not in the brick-and-mortar sense.
But the larger issue I see for Cohen is that he isn’t going to get a chance to invent a category as he did to a large extent with Chewy. This is a mature industry where GameStop will face lots of competition. And GameStop was late to fully embrace e-commerce, which has cost the company market share.
And, although at the time of this writing GameStop had not reported earnings, the company’s holiday report indicated same-store sales were down.
Culture Matters
One statistic about GameStop that I found particularly troubling was this. The company has had five CEO’s since 2017. As a sports fan, I know that when teams have a lot of turnover at the top it rarely leads to success on the field or court. That’s because it’s generally a sign of a culture problem.
And it appears this problem dates back to 2009 when the company’s business model was threatened by the emergence of digital downloads and cloud gaming.
Cohen has the clout to get his people in place. Whether those will be the right people to fix the problem is to be determined.
Committees Rarely Work
Or maybe the better way for me to say this is that a committee usually exists to codify the solution that the founder of the committee wants. In this case, if Cohen is aware of the innovations he wants to initiate, why have a committee? Just institute your plan.
On the other hand, this could be a play for time as Cohen begins to realize he has to learn what he doesn’t know about the sector. Either way, investors will want to hear a lot more than that the committee is “efforting” to put together a “strategic plan.” Sorry for the cynicism, I’ve just seen this playbook too many times.
Is GME Stock a Hopeless Case?
GameStop did nothing to cause the massive surge in GME stock. But this is a company that was on a fast track toward bankruptcy and was not a pandemic winner, despite a favorable environment for the gaming sector.
So at nearly $200 a share, I say yes, it’s hopeless. But is it worth more than the $20 per share it was trading at on Jan. 1? Consider this. GME stock was trading as a single-digit stock until Cohen became a board member in December 2020. So you can say that Cohen got the stock a nice bump as it was.
Now he has to turn his hype into hope. Planning to have a plan is not going to be good enough, nor should it be. Like a new coach or general manager, Cohen deserves time to execute his plan. But that doesn’t mean you have to invest in the company while he does.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.
