Why I still think GameStop is a trap

This is The Takeaway from today’s Morning Brief, that’s possible to register to receive in your inbox every morning, along with:

Sometimes there is no middle ground in the cutthroat business world.

Either you’re a winner.

Or you’re a loser.

A winner wins because he does something better than everyone else, usually over a longer period of time. Through a mix of perseverance, creativity and excellent execution, the winner will build on his success and increase his lead.

This also involves a dose of luck.

A loser does the exact opposite of this playbook.

I return with this simple message after another wild week of trading in GameStop (GME) stock – a week dominated by an unverified social media account allegedly run by a man known for red headband, boring T-shirts and a penchant for flexing his alleged dollars in a trading account.

GameStop stinks. It will 100% be a loser in the long run. Maybe 110%.

And you know what, friends?

To emphasize this point again, I’m not going to use one iota of the sophisticated analysis I taught myself when I was an independent stock analyst covering 55 retail companies. I will do two things.

First, point out that the company’s first quarter revenue fell 29% year over year. The company lost $32.3 million in the quarter, compared to a loss of $50.5 million a year earlier.

The business trends are getting WORSE!

Here are those numbers via the company’s laughably short earnings release Friday morning.

Second, I’m going to post a link to the company’s latest annual report here and then add these quick observations:

1. The company is aggressively refusing to shrink a store base of 4,169 locations worldwide. Stores that sell similar products, like Walmart (WMT), are investing aggressively in AI and same-day delivery services, making visits to competing stores a virtual waste of time.

2. The company is losing a lot of money amid an ongoing, structural downward trend in sales.

3. Margins are under pressure, and that’s true.

4. The company is too dependent on consoles: 56.8% of sales last year came from hardware and accessories. But console sales are taking on an increasingly bleak outlook as PCs and smartphones battle for market share.

5. The three objectives listed under the ‘business strategy’ section – establishing retail excellence, achieving profitability and leveraging brand equity – are not being consistently executed.

You GME fans may not want to admit this, but fundamentally analyzing a company is still important. This is how the mechanisms of the market work. This is how real wealth is built.

The story continues

“You can never lose sight of the fundamentals,” Interactive Brokers chief strategist Steve Sosnick said on my “Opening Bid” podcast (video above), adding that GameStop’s top and bottom lines are likely to remain under pressure to stand.

That’s why this stock has risen from a high of $66 when “activist investor” CEO Ryan Cohen joined the board in January 2021, to a low of $9.95 in mid-April, before Keith Gill’s latest attack. Shares closed at $28.22 on Friday.

Cohen has launched a crackdown to reverse the company’s future trajectory. Meanwhile, the company’s performance has been abysmal. I stand by everything I wrote in my open letter to Cohen on June 9, 2023, when the stock was trading at $23.

In fact, I’m going one step further: I’m personally inviting Cohen to Yahoo Finance’s big Fall Invest conference (here’s a list of 2023 notable speakers) to debate with me on the main stage about what the heck he’s doing with GameStop.

Ryan, the event will take place on November 12th in New York City. My email is below.

You owe it to your legion of supporters to discuss what you do with their public support and dollars.

And don’t message me that Cohen saved the company with its recent $933.4 million cash grab via a stock offering and another planned $75 million offering announced Friday. All of this means the company can continue buying inventory for a few years while also securing a plethora of leases for stores that most of America doesn’t visit.

What does winning look like in the consumer space? Check out these links:

Would you like to debate me today on GameStop?

I’ll wave you into the octagon at X – I’ll be here all day @BrianSozzi answering your messages. I will block your account for every inappropriate message. I want to hear your honest analysis about this company and why you love it.

In the meantime, enjoy reading GameStop’s 10-K.

Still can’t get enough of GameStop? Here’s what renowned value investor Jonathan Boyar had to say about the company during ‘Opening Bid’.

Brian Sozzi is editor-in-chief of Yahoo Finance. He is also the host of the “Starting bid” podcast. Follow Sozzi on Twitter/X @BrianSozzi and further LinkedIn. Tips about deals, mergers, activist situations or something else? Email brian.sozzi@yahoofinance.com. Are you a CEO and want to join Yahoo Finance Live? Email Brian Sozzi.

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