GameStop Corp (GME, Financial) recently posted a Loss Per Share of 0.33, with a daily loss of 6.25% and a 3-month loss of 35.51%. Although these figures may seem discouraging, our analysis aims to answer a critical question: Is GameStop (GME) significantly undervalued? We invite you to delve into this comprehensive analysis of GameStop's valuation, financial strength, profitability, and growth prospects.
Company Introduction
GameStop Corp is a U.S. multichannel video game, consumer electronics, and services retailer. The company operates across Europe, Canada, Australia, and the United States, selling new and second-hand video game hardware, physical and digital video game software, and video game accessories. With two main business segments: Video game brands and Technology brands, GameStop's current stock price stands at $15.43 per share, with a market cap of $4.70 billion. This analysis will explore whether this price accurately reflects GameStop's intrinsic value, also known as the GF Value.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line indicates the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
GameStop (GME, Financial) appears to be significantly undervalued based on the GF Value calculation. At its current price of $15.43 per share and a market cap of $4.70 billion, the long-term return of its stock is likely to be much higher than its business growth.
Link: These companies may deliever higher future returns at reduced risk.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. GameStop has a cash-to-debt ratio of 1.88, which ranks better than 75.11% of 1097 companies in the Retail - Cyclical industry. Based on this, GuruFocus ranks GameStop's financial strength as 7 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. GameStop has been profitable 5 times over the past 10 years. Over the past twelve months, the company had a revenue of $5.80 billion and a Loss Per Share of $0.33. Its operating margin is -2.15%, which ranks worse than 76.87% of 1111 companies in the Retail - Cyclical industry. Overall, GuruFocus ranks the profitability of GameStop at 6 out of 10, which indicates fair profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of GameStop is 1.8%, which ranks worse than 55.75% of 1044 companies in the Retail - Cyclical industry. The 3-year average EBITDA growth rate is 2.1%, which ranks worse than 63.3% of 891 companies in the Retail - Cyclical industry.
Evaluating Profitability: ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, GameStop's ROIC was -11.81, while its WACC came in at -3.61.
Conclusion
In conclusion, the stock of GameStop (GME, Financial) gives every indication of being significantly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 63.3% of 891 companies in the Retail - Cyclical industry. To learn more about GameStop stock, you can check out its 30-Year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
