Wednesday, January 25, 2017

Analysis of GameStop

Please read the disclaimer here: Enjoy the article, bitches!

Whaddup fam. In this article, we will be taking a look at GameStop, a retailer of video games, collectibles, consumer electronics and AT&T’s products and services. As y’all know I’m a huge gamer. I’ve spent hundreds of hours just playing the fuck out of the Dark Souls/Bloodborne series. The feeling you get from effectively dodging the attacks of a tough boss and finally coming out on top after many tries is, honestly, better than sex. Needless to say, I was really excited to finally get a piece of the action of the gaming industry. I bought 100 shares of GameStop at $25.28 per share. The stock closed at $23.58 on January 20, 2017.

Update on the Greedy Dragon portfolio: I sold 650 shares in Northern Oil & Gas at $3.9 per share yesterday to increase my cash holdings. I still own 2,300 shares in Northern Oil & Gas.

The main rationale for investing in GameStop is that the stock is cheap, the company generates good returns on capital, and management has shown a willingness to reward shareholders. The stock would have a price/earnings ratio of 6.46 if you take the company’s low-end estimate for earnings of $3.65 per share for 2016 (excluding any year-end impairments and store closing charges). As at October 29, 2016 the company had shareholder’s equity and total assets per share of $20.48 and $50.44, respectively. So, if we take the company’s estimate for EPS of $3.65 for fiscal year 2016, GameStop would have a ROE and ROA of approximately 17.82% and 7.24%, respectively. This is impressive, especially if you take into account that the company has goodwill of $1.726 billion on its balance sheet.

Based on the dividends paid out over the past 12 months, the stock would have a very healthy dividend yield of 6.28%. Unfortunately, I’m getting wasted by the 30% withholding tax that the U.S. government slaps on dividends paid to foreign individual investors. C’mon republicans, help a brother out and cut them withholding taxes. If you include the $36 million in share repurchases for the 39 weeks ended October 29, 2016, GameStop would have a trailing twelve months shareholder yield of around 7.75%.

The company did, however, experience weaker sales in 2016. Net sales decreased 4.7% for the 39 weeks ended October 29, 2016 as compared to the same period a year ago. The company recently reported a 16.4% sales decline for the nine-week holiday period ended December 31, 2016 as compared to the 2015 holiday sales period. The figures that jumped out like Princess Peach (she does jump higher than Mario according to The Game Theorists) were the 27.5% and 10.8% year-on-year decline in new video game hardware sales and new video game software sales, respectively for the 39 weeks ended October 29, 2016. New video game hardware and new video game software contributed approximately 4.8% and 18.8%, respectively to the company’s gross profit for the 39 weeks ended October 29, 2016. GameStop’s biggest money maker was pre-owned video game products which contributed about 36.23% to the company’s gross profit for the 39 weeks ended October 29, 2016. Sales of pre-owned video game products experienced a year-on-year decline of 4.4%.    

According to the company’s Q3 2016 earnings report, the decline in new video game hardware sales is a result of “a decline in the quantity of hardware units sold combined with a reduction in selling price of certain models as the console cycle matures.” This makes sense as the PS4 and Xbox One has been out for quite some time now, therefore fewer units are being sold and discounts are being offered. Hopefully the launch of the Nintendo Switch might help new hardware sales some when it’s launched later this year. However, I don’t expect a consistent rebound in hardware sales (I wouldn’t be surprised if sales continue to trend downwards) until the next generation of consoles are released, which could be way down the road.

The decline in new video game software sales was due to stronger performance of new title releases in 2015. For instance, sales for Mortal Kombat X in April 2015 exceeded that of the entirety of all April 2016 new launches by 18 percent. You had the usual slate of sports games such as NBA and FIFA launched in September 2016, however, September 2015 saw the release of the sports titles  AND Metal Gear Solid V as well as Destiny: The Taken King. There was also not much in the way of major new video game software releases during June and July in 2016. Note: This paragraph is prepared with data from VentureBeat’s articles on The NPD Group’s monthly reports on the U.S. video game industry.

I like that the company has been hard at work diversify its profit streams by growing its collectibles and technology brands segments. Sales from collectibles and the technology brands division were up 96.3% and 56.7%, respectively for the 39 weeks ended October 29, 2016. The technology brands segment is engaged in the sale of wireless products and services and other consumer electronics. The technology brands division contributed 18.99% to the company’s gross profit, while collectibles contributed a more modest 5.15% to gross profit for the 39 weeks ended October 29, 2016. The technology brands segment has a crack-like gross profit margin of 68.1% which is just fucking beautiful. It’s important to note that the growth of these two segments were boosted by acquisitions. Investors should keep an eye on the sales that these two segments generate in future periods to get a better idea of their organic growth rates. I would get an orgasm if the technology brands division is able to maintain strong growth without acquisitions.  

Overall, I think that the stock provides a large enough margin of safety at current prices. I don’t see the company experiencing financial distress in the foreseeable future. The company has $814.3 million in debt as at October 29, 2016. I believe that the debt is very manageable considering that the company had operating profit of $271.1 million just for the 39 weeks ended October 29, 2016. As the company appears to be on sound financial footing, I’m contented to just sit on the stock and wait for it to appreciate closer to what I think its intrinsic value is. It also doesn’t hurt that I would be getting pretty good dividends to hold the stock. It’s like I’m getting paid to eventually get paid (I hope).

Aight guys, I think I will end the article here. I need to try and complete Rise of the Tomb Raider before Nioh comes out (Lara is so fucking hot when she’s squeezing through tight spaces). As always, thank you for reading. Take care and stay rational.


  1. Hey Justin, just stopping by to say hi. I always enjoy reading your write-ups of companies in non-conventional sectors and as a fellow gamer and investor, I really enjoy this one too.

    But, before you start buying more of this company, as much as I hate being a wet blanket, I feel obliged to share with about Gamestop's recent controversy with their business strategy and how it is affecting their employees and customers, in case you did not know this.

    Gamestop's response to the above:

    Also, I have to say, you're pretty gutsy investing in US companies, considering the shitty situation the ringgit is in right now. I've pretty much dismissed any foreign share purchases till the foreseeable future :(

    1. Hi, thanks for taking the time to leave a comment. If GameStop is indeed implementing such a policy, then I think that would be bad for business over the long-term. It is certainly something to consider when evaluating whether or not to buy the stock. However, I personally will hold on to my current holdings in GameStop as I think the stock is cheap enough. Hopefully the public backlash will cause GameStop to revise their policy if they indeed are implementing a policy that gives their employees the wrong incentives.

      Yes, I do worry abit about my US holdings in case the Ringgit starts to strengthen. I am considering trying to hedge my USD exposure by using my US shares as collateral to borrow dollars and convert the dollars to ringgit to purchase dividend paying Malaysian stocks. However, I need to do more research on it. My remisier also tells me that there is no such service for retail investors in Malaysia and I have to go to Singapore to perform such transactions. So, I need to make sure if it's legal to transfer some money to Singapore for the purpose of conducting such activities.

      Anyway, glad to hear from you. Hope your portfolio is doing well. Take care!

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