Personal Investment Reflection

Is GameStop Doomed? I Visited Their Stores in NY to Find Out

Chris From RWOA.io, Re-ThinkWealth Content Expert

14 January 2018

My Thesis on Buying & Holding GameStop

My average cost of buying GameStop shares for my portfolio is $18.48.

As of the market close on 11 January 2018 at $19.96, I am at a 7.81% paper gain excluding of realized gains I received via dividends and options premium. And GameStop consists of 30.80% of my portfolio – second on the list – with the first being Qualcomm at 40.60% of my portfolio.

Naturally, going down to GameStop stores in New York while I was on holiday is something that I planned to do.

I want to analyze roughly the feel of their offerings, traffic, sales in relative to other retail offerings for collectibles and games there in New York.

What I Planned to Do in New York (While on Holiday)

I wanted to visit their stores and filmed a video on my experience and share it with you.

Unfortunately, I accidentally deleted the video. I am still trying to find it but to no avail so far.

That sucks because I even brought a dedicated mic for me to film the video. I thought I had uploaded the video from my iPhone to my Google drive so I deleted the ones on my phones. But the fact is that the upload did not go through and I already deleted all my videos on my iPhone.

Nevertheless, I remembered the whole experience. I even bought two collectibles from GameStop for my girlfriend, Jessica there.

So I experienced the whole buying experience as a customer at GameStop.

gamestop stock analysis

Before I visited GameStop stores, I also found out that many departmental stores such as Target and Walmart are also selling GameStop gift card as you can see from the image above that I took there.

This means that the distribution network for GameStop in selling their gift cards is good because even big companies like Walmart is selling them.

If people buy GameStop gift cards, naturally it is a sale for GameStop because they have to buy something from GameStop to utilize their already paid gift cards. This is a good sign, of course providing that people do buy them.

In this aspect, GameStop did not release the impact of its sales from its gamecards as well from its 2016 annual report.

Visiting GameStop Stores & What I Found Out There

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Source: GameStop

The first GameStop shop that I saw and visited in New York happened during one of our rest stops during the New York tour before heading to Canada.

I remembered vividly that the GameStop was just right next to Wing Stop because we had our dinner there. The Wing-Stop dinner was especially good. But my focus was on the GameStop experience next to it.

Now, you can take my observations with a pinch of salt because while I promise to be objective by pointing out to the facts I saw at hand, I also own quite a good amount of GameStop shares so you believe that I might be biased.

Here it goes.

The moment I walked into the GameStop store, I already see people queuing up to pay for things that they bought.

The first thing that caught my attention was the collectibles at the left-hand side of the door nearest to the entrance.

Source: Pinterest

Talking about collectibles, GameStop mainly sells collectibles made by Funko such as the one you can see from the image above.

Even in Jakarta, these Funko collectibles are starting to become trendy and people started buying it. But the price varies a lot. The price in Jakarta can be double of the price that I bought at GameStop in the U.S.

I think that definitely there is an opportunity for further growth for GameStop in selling collectibles – as planned by the management by opening up more ThinkGeek stores.

Another thing that caught my attention while I was in GameStop was that the stores have a very appealing way of communicating its promotions. Things, like buying 1 and get the 2nd one at 50% off for collectibles, is plastered everywhere. So it encourages sales. I even bought some collectible there.

There is nothing special about the two guy mending the cashier at that point in time. There were neither rude nor friendly. Knowledge wise in my opinion it was also nothing special. They were there just to administrate the transactions.

So far in New York, I have looked at around 4 GameStop stores and every time I peeked in, there is always someone paying for something at the cashier. This is a good sign.

In which it obviously translated well into its recently reported 2017 holiday sales results.

Global same-store sales increased 11.8%; 13.7% in the U.S. and 7.9% internationally with growth fueled by strong performance in new hardware, software, accessories, and collectibles.

However, technology business did not perform well and management had to do a write down which the market reacted badly by pushing the stock down 11% during the day of the 2017 holiday sales reporting on 12 January 2018.

Armed With This Information – My Course of Action (or Inaction)

After the technology business write-down, GameStop’s stocks have been on a downward spiral to $17.40 as of 23 January 2018 market close. That is a paper loss of about 6% for me. But with the dividends and options premium, I had already received, I am not too far down.

I even managed to buy a bit more of GameStop shares on 23 Jan at $17.20.

The reason for that is because I still think that GameStop stocks are undervalued comparing GameStop’s business value relative to the price that its stocks is currently trading at.

And from my observations in NY, it reinforced my conviction that GameStop is not even near to the brink of bankruptcy.

But at a price to earnings ratio of about 5 with a payout ratio of 44.20%, the market is pricing it as if it is on the brink of bankruptcy.

Its return on equity is still fundamentally sound at above 15%.

In fact, it’s latest cash and equivalents holdings as of 2017 is at $669.40 million which is higher than it’s 10 year average at $634.73 million.

The highest it ever went was in 2008 at $857.41 million of cash and equivalents but it comes at a price to earnings less cash ratio of 26.57 as compared to the current 3.70 as of 26 January 2018.

The risk here is that the intrinsic value of the business would decline at a much faster rate. And the market will never fully value what GameStop. A lot of people think that GameStop will go out of business soon and price it as such.

But meanwhile, I am satisfied with holding it for a dividend yield of close to 9%  and an earnings yield of 19.93%.

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