A $1.4 Billion Reason to Buy GameStop Stock Now

Shares of specialty retailer, and meme stock legend, GameStop (GME) rallied 2.8% intraday on Aug. 31, as the company announced that it has amended its agreements with certain noteholders to exchange and cancel about $1.40 billion of its convertible notes due 2030 and 2032. 

In the original terms, the exchange was to be settled entirely in shares of GameStop’s class A common stock. However, under the amended terms, noteholders will receive approximately 55.5 million GameStop shares and $358.40 million in cash (funded from the company’s existing cash balance). 

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Shareholders enjoyed this move, as it essentially retires $1.40 billion in debt, cutting its long-term debt load without using much cash. However, this also raises share dilution. 

Let’s take a closer look at GameStop now…

About GameStop Stock

GameStop, headquartered in Grapevine, Texas, is a video-game and consumer-electronics retailer best known for the 2021 short squeeze that turned it into a market landmark. It is a global specialty retailer of video games, consumer electronics, and gaming accessories, operating both physical stores and e-commerce platforms. 

Once the largest mall-era game retailer, GameStop has narrowed its footprint while expanding into collectibles and digital initiatives. The company has a market capitalization of $8.25 billion. 

GameStop’s stock is down about 20% over the past 52 weeks mainly because of investor concerns over share dilution and uncertainty around its strategic plans. This year, the stock is down 6%. The stock had reached a 52-week low of $17.79 on Aug. 20 but is up about 6% from that level.

On a forward-adjusted basis, GameStop’s price-to-earnings (non-GAAP) ratio of 14.14x is lower than the industry average of 15.81x.

GameStop Posted Higher Profit and Revenue in May-Ended Quarter

For the quarter ended May 2, GameStop reported revenue of $835.30 million, up 14% year-over-year (YoY). The tailwind came from the company’s aggressive push into high-margin collectibles. Its collectibles revenue rose 65% from the prior-year period to $348.90 million, accounting for 41.8% of net sales and becoming its largest segment. On the other hand, its hardware and accessories revenue declined by 3.4% to $333.70 million, while software revenue decreased by 13% to $152.70 million. 

GameStop’s gross profit increased 34.6% YoY to $340.30 million, which makes a 40.7% gross margin. The increase in gross profit and gross margin was driven primarily by a shift in sales mix toward higher-margin product categories, particularly collectibles. The company’s net income climbed 769.6% from its year-ago value to $389.60 million, as GameStop reported $268.40 million in net unrealized gains on derivative assets from entering into Put/Call Pairs that provide economic exposure to eBay (EBAY) common stock. 

GameStop’s eBay Pitch and Q2 Expectations

For the second quarter (ended Aug. 1), GameStop expects its net sales to be in the range of $780 million to $800 million, compared to $972.20 million in the prior-year period. The company cited the prior-year launch of the Nintendo (NTDOY) Switch 2 as the reason. Another reason is GameStop’s planned exit from France and store closures as the company focuses on its collectibles business. 

However, its profits are expected to expand. The company expects operating income to range from $150 million to $170 million, up from $66.40 million in the prior year’s second quarter. Net income is expected to range from $290 million to $310 million, up from $168.60 million in the prior-year period. Net income includes about $238 million in net gains from its eBay derivative asset and equity investment. 

The biggest news of the quarter was that GameStop is not letting go of its eBay ambitions. After being rebuffed for a takeover bid in May, GameStop has built a significant stake in the e-commerce platform. During the quarter, the Company converted its previously disclosed derivative position related to eBay into a direct equity investment. As of Aug. 1, GameStop held approximately 43.4 million shares of eBay common stock with a fair value of approximately $4.95 billion. 

However, analysts have questioned how the company would finance the eBay takeover. They also questioned the limited overlap between GameStop’s and eBay’s core businesses. 

On the date of publication, Anushka Dutta did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com