That’s stunning volatility powered by a Reddit movement, speculation, and people trading the stock without actually considering the underlying business.
The company, however, does not control its stock price and has worked to use the unexpected rise in GameStop stock as a level to help it reimagine the business so it can actually increase sales and move from a loss ($61.6 million in the most recent quarter, an improvement from $111.3 million in the same period a year ago) to sustained profitability.
To do that, the company has cut its physical store count by 9% and has a detailed (if not fully explained) plan to transform its business. CEO Matt Furlong, working with Chairman Ryan Cohen (who founded online powerhouse Chewy.com (CHWY) - Get Chewy, Inc. Class A Report) detailed the progress being made on those efforts in the company’s most-recent earnings call.
What Exactly Is GameStop Doing?
Furlong said that his company has been refocused on the long-term goals: “delighting customers and delivering value for stockholders.”
To actually achieve those fairly vague objectives, he explained that his company has taken multiple steps in the second quarter to fortify its infrastructure and technology.
"We are focused on positioning GameStop to scale while obsessing over competitive pricing, expansive selection, and fast shipping. Our actions included continuing to add technology talent across the organization, including individuals with experience in e-commerce, UI, UX, operations, and supply chain.
"We also continued to expand our fulfillment network by adding a 530,000-square-foot facility in Reno, Nev. This new facility, which is expected to be operational next year, will position us to further expand selection and expedite shipping."
That Reno facility gives GameStop a fulfillment network that operates on both coasts as it joins another recently completed 700,000-square-foot facility in York, Pa., which began shipping orders during the quarter. That allowed the company to increase the selection of products it can ship across a variety of categories including consumer electronics, collectibles, toys, and more.
Fulfillment isn’t the only area the company has chosen on which to focus. GameStop has also been investing in customer service, according to its CEO.
“We signed a lease on a new customer care facility in South Florida and started adding talent to that team as we continue to build out customer care operation in the U.S.,” Furlon said.
It should also be noted that while GameStop’s sales may not justify its valuation, it has used its higher share price to shore up its finances.
“We further strengthened our balance sheet and capital position by raising more than $1.1 billion in net proceeds from the June ATM program,” he added.
The company has just over $1.7 billion in available cash, an increase of over $1 billion since the year-ago quarter.
That comes from a $1.1 billion stock sale. GameStop has not tapped its asset-based revolving credit line and its only long-term debt is $47.5 million unsecured low-interest loan “associated with the French government's response to COVID-19,” according to the CEO.
Making Money on GameStop
The GameStop meme phenomenon happened because a group of Reddit users from the WallStreetBets channel noticed that there was a very high level of institutional shorts on the stock.
Betting against short sellers when a stock is heavily shorted can (and, in this case did) push the stock higher, but shorting comes with risks, according to Real Money Pro contributor Doug Kass.
“Shorting individual stocks exposes a short seller to tail risks associated with the sometimes lunatic trading at WallStreetBets, Robinhood et al, which routinely target stocks for short squeezes,” he wrote.
“The market is littered with examples of this — like Digital World Acquisition Corp. (DWAC) (remember when the shares traded at $175) AMC Entertainment (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report, GameStop, Ginkgo Bioworks Holdings (DNA) , Robinhood (HOOD) - Get Robinhood Markets, Inc. Class A Report (remember when the shares traded at $80?), etc. — in which tail risks to shorting are a bonafide investment threat.”
Get more of Kass's trading strategies and investing ideas on Real Money Pro. Read The Structural Problems Associated With Shorting.
GameStop management has taken steps to stabilize its business and provide a path forward for the company to be a money-making entity.
But, when you consider trades or investments in a company which loses money and has no clear path to meaningful profits, it’s important to remember that stock price often has no correlation to stock value — and even less relation to whether the share price will move higher or lower.