(wow) Words Of Wonders Level 1101 Answers – Meme exchange Gamestop (NYSE:GME) is on another wild ride. The stock has held up even in a very tough market, despite the fact that the company has little, if any, intrinsic value left. Some speculators are optimistic about the company's new initiatives, such as the upcoming launch of the NFT market or renewed demand for the company's software line of products. But beyond that, it is also possible that the rest of the prediction is nothing more than a silly game. To be fair, there's always a chance for GameStop to pull off a miraculous fix if the current venture is successful. But this move should be considered a moonshot, with other possible consequences, the company ultimately failed. For speculators, this may be perfectly acceptable. But for real investors, GameStop isn't a company to seriously consider buying right now.
It can be tempting to buy a company's stock just because it's going up, or to buy an asset because it's going up. If the market sentiment is in favor of such investments then easy money can be made. But if it is not supported by the foundation, the end result is predictable. Examples include, but are not limited to, the South Sea Bubble, Tulipomania, the bicycle craze of the 1890s, the Australian land bubble of the late 1800s, and many other speculative events. Of course, it's easier to point to a broad time frame, but specific investment examples like GameStop have certainly been around for a while.
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The last time I wrote about GameStop, it was March 15th of this year. In the article I said that the company does not have significant values with it. I understand that the low level of debt and excess cash on its books means that the company has limited near-term risk. But I also say that investors should expect pain in the future. Without significant changes to its business model, I don't see the company surviving in the long term. But because of how much the stock has fallen, I've decided to rate the company only a ‘Sell' outlook, as opposed to the ‘Strong Sell' rating in a previous article. The S&P 500 is down 3.9% since the above article was published. By comparison, GameStop shares are up 19.8 percent. Of course, that doesn't change the fact that my previous article about the company was spot on. Since my December 2021 article was published, stocks are down 38.4%, compared to 14.2% for the S&P 500. And if you go back to June of last year, GameStop is still down 58.4% compared to the 5.3% decline seen in the broader market.
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Based on this revenue disparity, you might think that GameStop's picture has improved substantially. But I do not believe that this is the correct explanation of what happened. In the latest quarter for which data is available, the company's fiscal 2021 fourth quarter sales rose year-over-year to $2.25 billion, up from $2.12 billion a year earlier. Software sales were particularly impressive, with revenue increasing 7.4% year over year. The revenue associated with the collection that the company sells is better. Revenue grew 22.4% year-on-year. In comparison, hardware sales grew only 2.2 percent.
With the improvement in earnings, the company's profits have taken a big hit. The company reported a net profit of $80.5 million in the last quarter of 2020 and a loss of $147.5 million in the fourth quarter of last year. Cash flow from operations increased from $164.8 million to $110.3 million. If we adjust for changes in working capital, it would drop from $149.1 million to negative $122.5 million. Meanwhile, EBITDA for the company went from a positive $50.3 million to a negative $126.9 million.
In addition to fundamentals, some investors can point to the company's upcoming NFT market launch, which should happen no later than the end of July this year. In light of this, the company has also partnered with Immutable X to create a $100 million IMX token fund, which will allow GameStop to receive $150 million worth of tokens once certain milestones are reached. While the NFT market can be a significant value generator for businesses, there is currently no data to assess its potential. Therefore, buying the company based on this value proposition is a no brainer. A company's total sales bank account is not a good idea because they represent only a small portion of the company's total revenue. At the same time, the software angle is quite good. But we're still looking at an 8 percent drop in total video game sales in the United States in the first quarter of FY2022. In March alone, sales declined by 15 percent, hardware sales by 24 percent, and content sales by 13 percent. So while the company experienced some positive progress on this front in the fourth quarter of last year, it can't be expected that this will continue as the broader gaming market is facing.
The really positive thing about GameStop is that the company has over $1.28 billion in debt. This leaves him with some wiggle room for the foreseeable future. But to see whether valuing a company even in cash makes sense, we need only exemplify one scenario. In 2021, for context, GameStop generated negative cash flow of $434.3 million, while EBITDA was negative at $236.9 million. A company with such consistently negative results is unlikely to survive. It's been a long time coming. But if the company survives and we think the stock is worth buying today, then at an EV (very high) to EBITDA of 20, the company would need to generate $311.8 million in EBITDA. The business last generated EBITDA of $384.5 million in 2018. But the video game industry has changed a lot since then, and the company has 1,257 dedicated stores worldwide compared to the 4,573 it operates today. So, in short, the recovery the company would have to experience to justify the current price, even if the incredible broad trade represents a remarkable change compared to the business as we know it today.
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According to the information provided, GameStop appears to be in trouble at the time of the murder. Lord last wrote about the company. Yes, there are some bright spots in its latest quarter and the company is working on some interesting initiatives related to NFTs. But at the end of the day, there's nothing about the company that justifies the stock trading anywhere it is trading today. For this reason, combined with the recent stock price gains, I have chosen to revise my rating on the company to Strong Sell.
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Daniels is currently the Managing Director of Evering Capital Advisors, LLC, a registered investment advisor that oversees a hedge fund and directs Crude Value Insights, which provides cash flow analysis and valuation of companies in the oil and gas industry. Is a value-oriented newspaper focused on. Gas fields. His focus is on finding businesses that trade at a significant discount to their intrinsic value using Benjamin Graham's investment philosophy and a contrasting approach to markets and stocks.
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Disclosure: I/We do not hold any stock, option or similar position in any of the companies mentioned and do not plan to initiate such position in the next 72 hours. I have written this article myself and it expresses my opinion. I did not receive any compensation for this (other than from Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
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