GameStop shares on stock split and NFT hype: Don’t be fooled

Shares of GameStop (GME 3.99%) coincided with the broader market in the first half of 2022, and fell almost 18%. This contributed to a fall of 31% for the prominent meme share in the second half of 2021.

However, the GameStop share made a comeback in July, gaining 15% in the first half of this month, mainly due to investor enthusiasm for a planned share split and the launch of the company’s long-awaited NFT marketplace. But investors should not be fooled by this rally. GameStop still looks like a terrible investment.

More games

Almost all of the rise in the GameStop share in July came in a single day: July 7th. The afternoon before, GameStop announced a four-for-one share split that will take effect later this month.

However, the share split looks like a ploy to increase investor interest and support the GameStop share in the short term. Usually, companies use share splits to make shares more accessible to individual investors after a large rise in the share price driven by strong income and / or income growth. Shopify and Tesla shares both traded for over $ 600 – and Alphabet and Amazon shares traded for more than $ 2000 – before the prominent companies announced share splits in 2022.

On the other hand, the GameStop stock traded for around $ 120 before the share split. Furthermore, the core business is in gravel. Sales increased by 8% year over year, but fell 11% compared to the first quarter of 2019 in the previous quarter. In addition, GameStop had a net loss of $ 158 million and burned over $ 300 million in cash. And in an ominous sign, the company fired CFO Mike Recupero and informed employees of a round of layoffs just 24 hours after the share split was announced.

In short, GameStop has no good reason to split its stock right now. Instead, this looks like a desperate move to revive interest in GameStop shares.

What about the NFT market?

GameStop shares received another boost last week after the company launched its NFT marketplace in public beta mode. GameStop almost immediately became one of the largest NFT marketplaces, with its top 50 collections selling nearly $ 3.5 million in 48 hours.

It’s easy to see why this got GameStop shareholders excited. But even though GameStop surpasses most other NFT platforms, it is still a fraction of the size of market leader OpenSea. And in any case, the NFT market has been in free fall this year.

Worst of all, the first wave of interest in GameStop’s NFT marketplace may just have been a stroke of luck. As of Friday afternoon, the top 50 collections had total sales of less than $ 0.5 million over the previous 24 hours, a sharp drop compared to the first day or two after launch. And since GameStop only collects a 2.25% commission on transactions, at the current pace, the NFT marketplace will generate well under $ 10 million in annual revenue.

Maybe GameStop’s NFT marketplace will make an impact over time. But even if it grew tenfold from today’s level, it would not move the needle for the company.

Avoid GameStop stocks

GameStop lost nearly $ 400 million in fiscal year 2021, and losses accelerated in the first quarter of fiscal year 2022. The outlook for the rest of this year is even worse. Retail sales rose 7.7% year-on-year in June, according to preliminary figures from the US Census Bureau, but sales in electronics and hardware stores plunged 9.1% as inflation increasingly pushes consumers’ discretionary budgets.

The recent change in CFO and layoffs suggests that GameStop has not been spared from this macroeconomic pressure. Thus, investors must prepare for even greater losses and continued cash burning over the next few quarters.

At the end of April, GameStop still had over $ 1 billion in cash and virtually no debt. It will enable it to survive some meager times. But the company’s weak long-term outlook makes the GameStop stock look like a bad investment, especially with the current valuation of over $ 10 billion.