Key Points
GameStop has reinvented itself as a collectibles retailer.
Thanks to cost-cutting, the business has turned profitable.
The company has diluted shareholders with at-the-market offerings.
GameStop (NYSE: GME) might be king of the meme stocks, but investors still hoping for a turnaround from the video game retailer will have to wait longer.
GameStop reported fourth-quarter results yesterday, and while profits grew thanks to cost-cutting, revenue in the quarter was down 14% to $1.1 billion, and it's hard for any business to mount a comeback when sales are falling by double-digits.
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Despite that decline, it managed to grow gross profit from $363.4 million to $386.8 million, a reflection of its evolution from a video game retailer to one more focused on collectibles, including trading cards. The company slashed its selling, general, and administrative expenses from $282.5 million to $241.5 million as well, which led to roughly flat net income, or $127.9 million, down from $131.3 million, though that includes a $151 million loss on digital assets. Shares outstanding also spiked due to several at-the-market offerings, and earnings per share declined from $0.29 to $0.22.
In addition to the double-digit decline in revenue, let's take a look at three other reasons to avoid the stock.
Image source: Getty Images.
1. The business model isn't reliable
GameStop may have needed to pivot away from video games in the digital era, but selling collectibles and investing in crypto doesn't seem like a serious or sustainable business model. The collectible business can lead to fad-like volatility, and crypto is prone to wild swings as well.
While the company deserves kudos for returning the business to profitability, that doesn't make it a desirable stock to invest in.
2. Ryan Cohen's performance plan is questionable
In January, the company announced a $35 billion performance-based pay plan for CEO Ryan Cohen, which would grant him options to buy 171.5 million GameStop shares. While the plan is attached to key performance goals, and Cohen is willing to work for free without it, the plan would dilute existing shareholders further, as the strike price of $20.66 on the option is below where the stock is currently.
3. Dilution is likely to continue
GameStop's shares outstanding jumped by nearly a third last year, and while the company is profitable, more equity raises could be in its future. With revenue falling, its profits don't look sustainable.
At this point, the stock is simply too risky, and its upside potential looks limited. There are plenty of better options available on the stock market, even for investors intrigued by the meme stock appeal.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
