GameStop’s Latest Job Cuts Shows the Emperor Has No Clothes

GameStop (GME) laid off some of its employees earlier this week. It was the second time in six months that the video game retailer reduced its headcount in a bid to become profitable. 

According to Axios, the company’s crypto team is where most of the losses are happening in this latest round of cuts. 

“‘Tough day today as we let go a number of wonderful, talented, collaborative folks across product, engineering, marketing, operations…and others,’ GameStop Senior Vice President of E-commerce Neda Pacifico said in a LinkedIn post,” RetailDive noted Wednesday.

Amazingly, despite clear signs the emperor (Chairman Ryan Cohen) has no clothes, GameStop stock remains annoyingly above $20. 

If ever there was a stock that should fall to penny-stock status, GME is it. Here’s why.

Crypto/NFT Dreams up in Smoke

On the one hand, GameStop stock is down more than 40% year-to-date. On the other, it still has a market capitalization of more than $7.1 billion. 

How is that possible after the FTX debacle? I’m lost for words.

At the same time, FTX was imploding, GameStop had just launched its ImmutableX-powered NFT marketplace. It had more than $5 million in volume traded in its first week. As The Tokenist pointed out in a Nov. 8 article, GameStop is “full Web3.”

“As the company’s next move, GameStop should partner with the FTX exchange. However, with a hot war brewing between Binance and FTX, there may be a change of plans. In fact, Binance just might acquire FTX altogether,” The Tokenist contributor Tim Fries wrote in November.

When opinionmakers like myself and Tim Fries write about fast-moving subjects, we can sometimes be gobsmackingly wrong. So, this isn’t, by any means, a criticism of his opinion. I’m just pointing out that while Web3 and the blockchain have a lot of potential, that doesn’t pay the bills. 

Now that the company is again laying off engineers and others involved in Ryan Cohen’s vision for a new-and-improved GameStop, it will be increasingly difficult to entice the most prominent players in Web3 to get anywhere near his empire-building. 

Maybe I’ll be wrong, but I doubt it. 

One Heck of a Short

Bireme Capital is a Pennsylvania-based Registered Investment Advisor. It produces a quarterly report for its clients utilizing its Fundamental Value strategy.

Here’s what they had to say about GameStop in Q2 2022:

“Amazingly, Gamestop is one of our only short positions to not fall in 2022. The stock trades at an $11.5b market cap, exceeding its pre-pandemic peak by billions of dollars,” Bireme Capital’s quarterly report stated.

“This is despite the fact that revenue is down 30% from the peak, gross margins are down 1500 bps, and the company has generated a negative free cash outflow of $700m in the last four quarters (we had to double check that number because it is so high).”

The report states, “We find it unlikely that Gamestop books a GAAP profit ever again.”

In Q2 2022, it lost $108.7 million on a GAAP basis, up from $61.6 million a year earlier. For the first half of 2022, its GAAP losses were $266.6 million, more than double last year’s first six months. On an adjusted basis, its loss for the first six months was more than three-fold. 

GAAP or non-GAAP, it’s hemorrhaging cash.

What About Collectibles?

There is no question that its collectibles business will be a bigger part of GameStop’s future revenues. That doesn’t mean, as Bireme Capital’s Q2 2022 letter suggested, it will translate into profits. 

Profits drive share prices.

In the first six months of 2022, its collectibles revenue accounted for nearly 18% of GameStop’s $2.51 billion revenue, 340 basis points higher than a year ago. However, it came at a cost. The company burned through nearly $440 million in free cash flow through the first six months. On an annualized basis, that’s almost $900 million, approximately the same amount as the cash on its balance sheet. 

With consumers being very selective about how they spend their money entering 2023, it’s hard to imagine GameStop being able to pull out of the loss column anytime soon.

GameStop reports its Q3 2022 results after the close today. The three analysts covering GME expect it to lose $94 million on $1.4 billion in revenue, down from $105 million and $1.3 billion in Q3 2021.

Given two of the three analysts have Sell ratings on its stock, the loss estimates could be low.  

In November, reports surfaced that Carl Icahn remained short on GameStop stock. It’s easy to see why—the company’s losing money by the boatload with no plan other than cost-cutting to shrink its losses. 

Like Bed Bath & Beyond (BBBY), the Chewy (CHWY) co-founder is proving over time that the emperor has no clothes. 

If you own GameStop, I don’t see your investment ending well. Of course, even billionaires like Carl Icahn can be wrong now and again. But in this case, I doubt it. 

For the people who lost their jobs, I feel for you. Unfortunately, you backed a losing horse. 

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