The bearish investors’ analysis seemed impeccable: GameStop is a company dedicated to selling video games in its stores in an era of online commerce and direct downloads over the internet. Betting against it was a textbook operation, even more so in the middle of the coronavirus pandemic. What the large speculative investment funds did not expect was that an emotional mobilization of small investors would bend the arm of their logic. With the famous Keith Gill (or Roaring Kitty on some of his social networks) as leader; Reddit, as the means; Robinhood, the trading platform on which to plot the coup, and Elon Musk as a spontaneous agitator, the purchases of shares by individuals caused GameStop’s price to soar to absurd levels in January 2021. From there, it continued to go much higher. A documentary, Apes Together Strong, and a feature-length film now recall that movement, with a somewhat idealized approach. What the recently released Dumb Money doesn’t tell us is, however, is how GameStop is doing two and a half years later. The short answer is: badly. The longer answer: not as badly as you might expect.
The investors’ thesis was that GameStop was destined to be the next Blockbuster — the ubiquitous video, DVD and Blu-ray movie rental company that was hopelessly wrecked by streaming TV. That hasn’t happened. GameStop’s sales were $5.927 billion for the year ended January 28, a decline of just 1.4%. The company is worth more than $4.4 billion on the stock market. The bet on its collapse was hasty and there were arguments that it was undervalued in 2021, when the fever of small investors broke out and the phenomenon of meme shares, driven by social networks, was born.
The purchases by individuals strangled the short-sellers, that is to say, they caused multi-million dollar losses for the funds that had bet on GameStop’s collapse. These were forced to close ranks to limit their losses, buying more shares themselves and feeding back into the phenomenon. Following a tweet from Elon Musk with a link to a Reddit thread about the company, the share price reached an intraday high of $483 per share on January 28, 2021, the equivalent of $121 after the split of each share into four that it undertook in July last year.
The upward spiral was halted in the short-term by some more than dubious moves, but the market has been passing judgment on a daily basis. Just this week, GameStop’s share price hit its lowest level since February 2021. The plunge from the high mark is almost 90%, but the stock is still worth more than three times what it was when the speculative fever began on social media.
GameStop has held up better than the worst omens suggested, but it is still fighting for its future. This is well reflected in the first message to employees from Ryan Cohen, a 38-year-old activist investor who bet on the company in 2020 and demanded changes in strategy. Cohen became a billionaire in 2017 by selling Chewy, the online retailer of pet food and other products, to PetSmart. He then increased his fortune by investing in Apple and in 2020 acquired more than 10% of GameStop. Three years later, he has decided to put himself in charge of managing the company, which announced his appointment as chief executive last week.
“It is not sustainable for GameStop to operate a money losing business. The mission is to operate hyper efficiently and profitably,” Cohen stated in a letter to employees after his appointment. “Our expense structure must allow us to endure any adverse scenario. Whether it’s a difficult economy or revenue deceleration from shrinking software, we must be profitable. Our job is to make sure GameStop is here for decades to come. Extreme frugality is required. Every expense at the company must be scrutinized under a microscope and all waste eliminated. The company has no use for delegators and money wasters. I expect everyone to treat company money like their own and lead by example.”
“Extreme frugality.” Tightening the belt. That’s the message to a company that has been unable find a path back to profitability. In the fiscal year 2018 GameStop, which is headquartered in Grapevine, Texas, was $673 million in the red; in 2019 it lost $471 million; in 2020, $215 million; in 2021, another $381 million; and in 2022, $313 million. Over $2 billion in five years, according to accounts filed with the U.S. Securities and Exchange Commission (SEC). Store closures and cost-cutting have reduced losses in the first half of the year to $53 million, but they have also taken their toll on sales, which fell by 4.5%. The company has had an isolated quarter of profits in the last two years, which sparked euphoria, but it was a mirage.
Over these two years, GameStop has been changing its strategy. The arrival of Cohen as a shareholder seemed to herald a bet on e-commerce, but the company had logistical problems aggravated by supply chain bottlenecks and posted a disastrous Christmas quarter to close the 2021 fiscal year. After that fiasco, the chain has put the nearly 4,400 stores it still has open — including nearly 3,000 in the United States — back at the center of its business. Not only does it use them as a base for packaging and collecting internet sales, but it has diversified its products to sell televisions, Nerf-branded toy guns, video game player’s chairs and other accessories and collectibles. The company has made a foray into the world of cryptocurrencies and the sale of non-fungible tokens (NFTs), but it came into that market just as it was deflating and has also failed to live up to expectations.
The only thing GameStop has delivered on is cost-cutting measures, including progressively reducing its workforce to less than half of the 23,000 employees it had in 2017. Austerity remains the recipe, but there is no clear strategy in sight to offset the unstoppable decline in video game sales and competition in the e-commerce sector.
But that GameStop is still operating and putting up a fight to ensure its future viability is already more than many expected three years ago. Other meme stocks that experienced speculative movements, such as Bed, Bath & Beyond, have succumbed to bankruptcy and ruined their shareholders. At GameStop, it is not game over yet.
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