America’s most notorious meme stock, GameStop (GME), will report its July quarter results next week, and the word on the street is that the stock will continue to face significant challenges, while investors excuse growing bearish technical indicators and high valuation concerns. However, improvements in financial performance and strategic corporate actions provide some optimism, including the company’s mounting cash hoard.
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Shareholders of the original so-called “meme stock” haven’t been pleased with its poor share performance over the past three months, following last quarter’s record-low sales—even though the company continues to execute well on its strategy of keeping core operations at breakeven.
CEO Ryan Cohen has been steering the company toward a holding company model, moving away from the declining hardware and software businesses and instead leveraging the strong market appeal of the stock. This has recently allowed GameStop to raise capital at almost no cost—through 0% convertible debt—and accumulate cash, with the intention of deploying it into assets (such as crypto) that could create value for shareholders.
But with no official word on crypto purchases—or any broader communication on how the new cash will be deployed—uncertainty around the company’s next move lingers. Naturally, indecision, uncertainty, or even mere dithering can weigh on a stock. Heading into Q2 earnings, I expect the market’s reaction to hinge less on headline financials and more on whether the company shows it’s doing something beyond simply raising money and letting it sit idle.
Given the confluence of factors, I’m sticking with a Hold rating as the bearish case struggles against a business that’s both profitable and cash-rich. In contrast, the bullish case still feels highly speculative without a clearer roadmap for a sustainable turnaround on top-line growth.
When Falling Sales Meet Rising Cash and Convertible Notes
Shares of the video game retailer are down about 25% since it last reported earnings on June 10. Despite beating bottom-line estimates with another quarter of profits totaling $44.8 million, the company saw another massive year-over-year decline in hardware and software—down 31% and 26%, respectively—partially offset by a 54% annual increase in collectibles sales.
This led to consolidated sales of $732.4 million, marking the worst quarter in at least the past fifteen years, even worse than the $942 million reported in mid-2020 during the pandemic.
Looking at the glass half full, GameStop shares aren’t in a total freefall. Over the past twelve months, GME is up ~1%, albeit far behind the broader market. To its credit, the company has maintained a frugal and lean operation, cutting any costs that aren’t strictly necessary for the core business to stay afloat—without incurring losses or harming cash generation.
It’s hardly surprising that the GameStop thesis is paradoxical. The classic meme stock saw total revenues drop from $6 billion in 2022 to $3.6 billion over the last twelve months, even as its cash balance ballooned from half a billion in 2021 to $6.38 billion in the latest report. Much of this cash came from equity offerings fueled by the meme stock saga, which inflated the valuation to extreme levels over the past five years.
The most recent move on its balance sheet came via a 0% convertible bond issuance, initially proposed at $1.75 billion and upsized to $2.25 billion after pricing, following a similar private offering of $1.5 billion in April. The upsizing, just two days after the Fiscal Q1 earnings release, shows that demand from qualified investors was strong enough that GameStop decided to sell more notes than originally planned. Much of this cash will likely go toward future Bitcoin purchases, as CEO and activist shareholder Ryan Cohen has been choosing to allocate GameStop’s capital in recent months.
Investor Focus Shifts to Cash Allocation
Perhaps the main reason GameStop’s shares plummeted so sharply after its quarterly results wasn’t just the shock of another steep decline in top-line trends. Instead, it was the fact that GameStop didn’t disclose any additional Bitcoin purchases beyond the 4,710 Bitcoin (BTC) acquired between May 3 and May 28.
As usual, the management team didn’t host an earnings call, nor did it comment publicly with more specific details of its strategic motives—except for a rare quick interview with CEO Ryan Cohen—beyond what’s reported in its SEC filings. As a result, investors were once again left wondering why GameStop seemed to take its foot off the gas.
Looking ahead to Q2, beyond the expected continuation of the same business dynamics, the key hope is for greater visibility into how and to what extent GameStop will actually use its massive cash pile, while its core business continues to struggle. This is because Q2 will reflect the impact of the upsized convertible note offering as cash on the asset side and long-term debt on the liability side—estimated at around $2.7 billion if the additional notes are purchased in full. So, in a way, it wouldn’t make sense to have a potential ~$9 billion cash balance while taking on debt and dilution risk, and yet not make any Bitcoin purchases—or any other strategic investment to aggregate value.
I also expect a post-Q2 announcement of a new 0% convertible bond issuance, potentially at even larger levels. This could remain an attractive deal for both sides, with GameStop securing cheap capital at zero interest—which is useful as its core business lingers on the edge—and qualified investors likely feeling confident converting the notes, given GME’s volatile profile and the strong demand in the previous issuance, even with a 32% premium on the weighted average share price at the time.
Is GameStop a Good Stock to Buy Now?
GameStop stock remains largely off Wall Street’s radar, as since 2021, it has been treated more like a meme stock than one trading solely on fundamentals. At the moment, there is only a single analyst rating for GME, provided by Wedbush’s Alicia Reese, who recommends a Sell and sets a price target of $18.50—implying an eye-watering 42% downside over the next 12 months.
Holding Steady Amid Cash Speculation
I don’t foresee any results from GameStop’s core business—other than an unlikely massive bottom-line loss—that would be significant enough to move the stock at this time. I believe investors will be primarily focused on how GameStop allocates its cash, which has gradually increased through convertible notes, rather than on any other factor. Any slight hint of Bitcoin acquisitions could spark a short-term bullish rally. Otherwise, if no action is taken to address the cash pile, the stock is likely to continue struggling.
Given that this remains a highly speculative thesis, I find it challenging to take a clear position. GME is currently too risky to short and too risky to go long without a clearly defined catalyst—which seems to be the case now. Therefore, I maintain a Hold rating for GME.