Today GameStop provided shareholders with a 4:1 Stock dividend effectively splitting its stock price from $150 to $37.
I created a DCF Model to calculate its intrinsic value. DISCLAIMER: These are purely my assumptions. You can download the DCF here.
In my worst case scenario I have GameStop being worth approximately $24.02 around 37.39% premium from current levels. My best case scenario indicates GameStop being worth $62.82 with a 63% discount from current levels.
Problems with GameStop
Lack of Profitability
GameStop hasn’t generated any operating income (EBIT) since fiscal 2018. The company increased operating losses by 1700% between fiscal 2019 and fiscal 2020. 2020-2021 Showed no improvement as losses increased another 42% to 361 million (excluding Impairments).
Mounting Store Closures
In 2018 there where 7276 GameStop locations compared to 4573 as of January 29, 2022. Overall decrease of 37%. Operating Expenses however have not decreased at the same rate, making each location costlier to maintain.
Diskless Consoles
“The current consoles from Sony, Nintendo, and Microsoft have facilitated download technology. Downloading of video game content to the current generation video game systems continues to grow and take an increasing percentage of new video game sales. If consumers’ preference for downloading video game content in lieu of physical software continues to increase, our business and financial performance may be adversely impacted.”
GameStop 2021 Annual Report
“In addition, both Sony and Microsoft currently offer consoles that only allow for the purchase of digital games and content and do not work with physical software. Sales of those types of consoles eliminate the ability of customers to purchase physical software, which may also adversely affect our sales of both new and pre-owned physical software.”
This is huge as Hardware and Accessories account for around 50% of GameStops total Revenue.
GameStop Pros
Pivot to Technology
“As we scale and expand our core offerings we will simultaneously invest in
GameStop 2021 Annual Report
additional growth, including blockchain, digital assets (including non-fungible tokens (“NFTs”)), Web 3.0 technology, and new destination formats for our stores.”
GameStop recently launched an NFT marketplace where they are receiving a 2.25% from every transaction, a pivot to the scale of OpenSea’s marketplace could be hugely beneficial for GameStop.
Problems with the model
This DCF Model is accounting for a baseline terminal growth rate of 1%, whilst unlevered free cash flow in the worst case is closer to 9%. Ideally we would just project the model for a longer period however it becomes quite trivial to project so many unknowns and come up with a reasonable answer. All of this is speculative and it is not recommended to make financial decisions based on this model alone.