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25 March 2021

GameStop Value Rises Despite Q4 Earnings Drop

The so-called “Meme-Stock” mania that hit markets back in January saw investors from the online chat forum Reddit take an interest in multiple underperforming companies, with the aim of boosting their share prices and squeezing out hedge funds who held large short positions against the stocks. After successfully pooling their investments, Reddit investors managed to inflate share prices far beyond what the companies were supposedly worth. At the heart of the frenzy was video-game retailer GameStop, which now has a market capitalisation near US$14bn, more than 10 times the US$1.3bn market value the stock had at the end of last year, and an extraordinary 57 times higher than the US$245m market capitalisation a year ago.

With GameStop’s bricks and mortar business suffering due to the pandemic, it was inevitable that the share price would return to a realistic valuation. However, the hype surrounding GameStop has sparked an urgent call to transform its business model to keep up with the modern world.

The highly-anticipated fourth-quarter earnings reflected the footfalls the company faced as a result of COVID-19, with revenue falling to US$2.12bn, compared with US$2.19bn in 2019’s fourth quarter. Store closures at the height of the pandemic were the main cause of the decline, with those that re-opened operating under limited hours and at a reduced capacity, while a total of 693 stores were permanently closed for the full year. Nonetheless, elements of a digital transformation were prevalent. E-commerce sales increased by 175% for the quarter, equating to 34% of total sales in Q4 versus 12% in the prior year period. These figures were reflective of new console releases this year, however, with demand for the PS5 and Xbox Series X so high that consumers shopped with whichever retailer had available stock.

A rise in e-commerce revenue and a reduction in store operating costs from closures contributed to an increase in net income. GameStop reported earnings of US$80.5m, or US$1.19 a share, for the fourth quarter compared to net income of US$21m or US$0.32 a share in the previous year’s fourth quarter. It is expected that reductions in operating costs will be permanent as the video game retailer continues to streamline its bricks and mortar business and focus on e-commerce.

Despite the decline in overall revenue for the year, the outlook has become increasingly positive as the development of GameStop’s online business is clearly a priority. The incoming appointment of Jenna Owens as Chief Operating Officer, previously a Director and Distribution Manager at Amazon, will bring expertise within e-commerce that will help catalyse the transformation from an outdated business model to one that can move with the industry’s ongoing transition to online distribution channels.

Investors reacted, with the share price reflecting this reaction to the earnings report, dropping 16% since its release. However, this is most likely due to the potential stock offering mentioned that would be used to fund the transformation.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
GameStop Value Rises Despite Q4 Earnings Drop
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