GameStop Manages $2B Cash Amid Falling $882M Sales

Key Takeaway

• GameStop's cash reserves have surged to $2 billion after raising $933 million from selling 45 million shares and planning another sale worth $1.9 billion.
• Despite a 29% decline in Q1 net sales to $882 million, GameStop has been cautious with capital outlays, focusing on debt reduction and low-risk investments.
• Stock volatility persists as Keith Gill's renewed endorsement failed to sustain momentum; GameStop shares fell to $24.83, impacting related meme tokens significantly.

GameStop's Cash Position

GameStop, the video game retailer at the center of the 2021 meme-stock frenzy, has seen its ecommerce strategy falter, its bricks-and-mortar store count shrink, and its sales decline over multiple years. However, one aspect of the company remains robust: its cash reserves. GameStop has managed to raise significant capital by leveraging its meme-stock status. Recently, the company sold 45 million shares, raising $933 million. Last Friday, GameStop alerted investors to a potential sale of another 75 million shares, which, at Monday’s closing price, would be worth $1.9 billion. This has brought the company's cash reserves to $2 billion.

James Angel, a finance professor at Georgetown University, commented on GameStop's strategy: "They are smart enough to say: ‘The capital markets are going to hand us capital today? We’ll take it. Even if we don’t have any use for it, we’ll grab it while we can and then look for a good use for it.’" Despite the significant cash pile, the company has not outlined any specific plans for acquisitions or investments, as stated in a recent prospectus.

Stock Volatility and Meme Influence

The recent surge in GameStop's stock price can be attributed to the re-emergence of Keith Gill, also known as Roaring Kitty, a Massachusetts trader who played a pivotal role in the 2021 rally. Last week, Gill returned to YouTube, reiterating his belief in GameStop's value and CEO Ryan Cohen's vision. "Now it’s all about the transformation. That cash pile is growing," Gill said. However, his followers seem less convinced this time, as GameStop shares have plummeted since his monologue, closing at $24.83 on Monday, down by half from their peak last month.

The stock's volatility has also impacted related meme tokens. The Solana-based meme token GME, which parodies the company, slid 25%, reversing a more than 200% rally from the past seven days. Other related tokens like Roaring Kitty (KITTY) and various cat-themed tokens lost an average of at least 10%, according to data tracked by CoinGecko. Dog-themed tokens such as Dogecoin (DOGE), Shiba Inu (SHIB), and Floki (FLOKI) also saw declines ranging from 4% to 10%.

Financial Performance and Strategy

GameStop reported a 29% decline in net sales for the first quarter ending May 4, amounting to $882 million. Despite this, the company held more than $1 billion in cash and marketable securities before the latest stock sale. The company has been cautious with its capital outlays, opting to hold onto its cash reserves or invest in low-risk securities like short-term government bonds. Most of the $1.7 billion raised from share sales in 2021 was used to pay down debt, earn interest, and offset operating losses. GameStop earned nearly $50 million in interest income in its latest fiscal year, more than offsetting its operating losses, while its interest expenses disappeared.

Michael Pachter, an analyst at Wedbush Securities, noted, "Instead of finding ways to increase revenue, he’s finding ways to cut costs," referring to CEO Ryan Cohen's strategy. Cohen, who joined GameStop's board in early 2021 and became CEO last September, has been criticized for not transforming the company into an ecommerce powerhouse as expected.

Street Views

• Michael Pachter, Wedbush Securities (Bearish on GameStop's strategy):

  "Instead of finding ways to increase revenue, he’s finding ways to cut costs."

• James Angel, Georgetown University (Neutral on GameStop's capital strategy):

  "They are smart enough to say: ‘The capital markets are going to hand us capital today? We’ll take it. Even if we don’t have any use for it, we’ll grab it while we can and then look for a good use for it.’"