Saved By The Meme – GAME ON!

Without a doubt, the story of the last five years of GameStop Corporation (NYSE: GME) is one of the most fascinating stories in the stock market's history.

HELL – they made a movie about it! Usually, only the biggest companies – like Apple or Phillip Morris – get films made about them. This is only a 4000+ store video game retailer.

Like everyone else, we have been captivated by watching the entire story unfold.

The combination of…

• dying bricks & mortar retailer

• investors like “The Big Short” hero Michael Burry

• a new CEO in entrepreneur Ryan Cohen

• a cult-like figure (Keith Gill or "The Roaring Kitty") leading a horde of retail investors and

• a short squeeze one of the anointed of Wall Street to near destruction…

…is a Wall Street story for the ages!

In the last year or so, the "saga" of Gamestop had faded into the background. This was until a couple of weeks ago when the kitty roared again!

The return of Keith Gill to social media saw a massive rally in the shares, bringing back memories of the post-COVID "mini-bubble" of 2021.

Personally, we have been following the stock for more than twenty-five years. At the start of our career, one of the first groups we focused on was the video game industry. We attended the giant video game trade event E3 for over a decade.

Gamestop was always there as a part of the investable universe and a stock we made money on several times across multiple video game console cycles.

We closely followed the stock and its fundamentals for two decades after it came public. Funny enough, when the stock first went ballistic in 2021 – we stopped looking at the actual operating results. They weren't relevant to the price of the stock in any way.

This remained true for the last few years until…this past week.

CEO Ryan Cohen and the management team took full advantage

 of the stock price rocketing again.

They issued 120 million new shares, raising gross proceeds of over $3.07 billion. They did this through an "at-the-market" (ATM) offering that allowed them to issue the shares into the open market.

We were watching it all unfold and thought to ourselves,…$3 billion is a LOT of money! What does the company's balance sheet look like?

Here is a snapshot from the most recent SEC filings on June 11…

This data is as of May 4, so it predates these equity offerings.

Before raising this money, the balance sheet was in pretty good shape!

You can see they have almost $1 billion of cash, $83 million of "Marketable securities," and an inventory of $675 million. 

Against this, they had only $14.9 million of long-term debt, $385 million of "Operating lease liabilities," and roughly $850 million of short-term liabilities.

We could go through a lot of detail, but they had $1 billion of NET cash. Not too shabby…

Now – if the company were BURNING a ton of cash, that might not be so good.

Here is a snapshot of their quarterly “Cash from Operating Activities” by quarter going back a few years…

There is a LOT going on in this data and quite a bit of "noise ."By the way, "LTM" means "last twelve months."

The key takeaway for us is that the company – under the stewardship of Cohen – has been seeing its cash burn fall. This makes sense; we will show you a chart of their operating profits below.

The number is going in the right direction, and in the LTM period, they have burned about -$200 million from operations.

Considering the $1 billion they already had on the balance sheet added to the $3 billion they just raised, they have $4 billion of NET CASH. If they continued to burn -$200 million annually- they could go twenty more years of operations.

That is a simplistic analysis but shows that this company is in an excellent position going forward.

Going back through the news on GME, I noticed something interesting that happened late last year that many folks probably ignored.

When the company reported Q3 2024 earnings in early December, it announced that the board of directors had changed its investment policy. This policy governs what they can do with the cash on the balance sheet.

It was about $1 billion back then, and – remember – now it is $4 billion.

The old policy restricted GME from investing in high-quality bonds. The NEW policy allows Cohen to invest in just about anything—public or private equity and (potentially) other asset classes.

This was a very interesting development when Cohen had $1 billion and had cut the losses (and cash burn) at GME. NOW that he has $4 billion, it is even more interesting!

What could he do with the cash?

Jim Cramer put forth one interesting idea on CNBC. What if he paid off and closed all the stores by paying off the bad leases and then just sat with the remaining cash?

Cramer had not run the numbers, but we shared them above – they have roughly $400 million in lease obligations. It isn't quite THIS simple, but net that out against the $4 billion of cash they have, and you would still have $3.5 billion to invest!

An even better idea would be for him to buy out the leases of the most distressed locations. Then, he could restore profitability and put them in a position to go on offense.

That is where it gets exciting.

Cohen had already done an excellent job playing "defense" by getting to a significant net cash position on the balance sheet and reducing losses. He also had a nice "war chest" to look at either growth strategies at GameStop or other investments.

Now he has a REAL "war chest."

We are not saying he would do ANYTHING like this, nor that he should, but the recent potential buyers for the company (National Amusements) that controls media giant Paramount Global (NASDAQ: PARA) have been about $2 billion. 

Paramount is the old Viacom and CBS and owns the Paramount movie studio and all of the CBS assets.

Cohen could offer $3 billion and have $1 billion to spare.

Does this deal make sense? Our point is that Cohen has a LOT of options at his disposal.

Another simple idea is, what if he parked a part of this "war chest" in BITCOIN?

You are likely aware of the software company MicroStrategy Incorporated's (NASDAQ: MSTR) success with this strategy.

We are not saying that he should do this either, but with the volatility of Bitcoin having fallen and the potential upside – we think it would be an intelligent move with some of the money.

What does all of this ultimately mean for the stock?

The CLEAR takeaway is that this stock is NOT a short. The company is not going away anytime soon, and Cohen now has an opportunity to deploy colossal capital.

Famed short-seller Citron Research agrees with our take as shortly after completing the second part of the equity offering, they announced they had closed their short…

Maybe the stock is NOT a short, but is it a BUY?

This is where it gets interesting…

After the issuance of the additional shares, there are not 426 million shares total outstanding. This brings the market capitalization up to over $12 billion.

You are essentially paying $12 billion for a $4 billion revenue business that is breakeven "ish" and burning a lot of cash. That doesn't sound great.

However, you are also getting $4 billion in cash and a "call option" on what Ryan Cohen does next, combined with a rabid shareholder base willing to support him.

We think the stock certainly doesn't fit any traditional investment strategy, but it is an interesting speculation, much like investing in cryptocurrencies.

Personally, we would go out and buy a small amount of stock. We think the stock could easily be cut in half in the next few months, but there is an equal or greater chance that it could "catch a wave" and double or even more.

We like the risk/reward!

Ultimately, what we are sure of most is that the story of Gamestop is only now JUST beginning…