GameStop Corp. (GME, Financial), once emblematic of the retail sector's struggles, has executed a turnaround that defies conventional expectations. Guided by an unorthodox CEO and largest shareholder, the company now boasts a balance sheet fortified with cash and minimal debt. This remarkable shift has been driven by what could be one of the most significant fundraising efforts in stock market history.
In this analysis, I will delve into GameStop's transition from pandemic-induced turmoil to a robust financial position and examine why betting against this stock might now be still precarious.
The largest fundraiser in history
GameStop today defies the logic of retail, where a business that does not grow often means it does not survive. That is because with competition at an all-time high, increasing profits and expanding operations simply implies staying competitive, not collapsing.
When we look at GameStop's business, since 2018, annual revenues have been in freefall (with a brief exception in 2022, when the trend briefly corrected itself). But perhaps in the whole world, GameStop is the only case of a company that has increased its cash and equivalents by more than 50% when it has reduced its revenue by about 40% in the last decade, as noted in the graph below.
How was this possible? Through probably the biggest fundraiser in stock market history.
In 2020, a year gripped by the chaos of the Covid-19 pandemic, the markets witnessed one of the biggest crashes in their history. During the height of the pandemic, the S&P 500 (SPY, Financial) suffered one of the fastest and steepest falls. Between Feb. 19 and March 23, 2020, the index fell by around 34%. Retail stocks in particular had mixed reactions after that. E-commerce companies such as Amazon (AMZN, Financial), for example, saw their shares rise significantly, reflecting the increase in demand for online shopping and delivery services.
Companies with a strong presence in physical stores, such as Macy's (M, Financial), JC Penney (JCPNQ, Financial) and Gap (GPS, Financial), initially suffered from falling sales and lockdowns, resulting in sharp declines in their share prices. However, essential retailers such as Walmart (WMT, Financial) and Target (TGT, Financial), which already had robust e-commerce channels, were able to adapt quickly.
GameStop, for not having a robust e-commerce channel and being a brick-and-mortar store, took the biggest hit. But the truth was that the stock had been in tatters since 2018. As a result, bears betting heavily against the stock will raise the company's short interest beyond 100% at some point (possibly given that the shares have been repeatedly borrowed and sold).
In 2019, for example, the negative pressure on GameStop was so strong that even famed trader Michael Burry (Trades, Portfolio) bought a sizable position after considering the high short interest in the stock and realizing that the business was undervalued. Burry even sent letters to GameStop management, recommending the repurchase of $238 million worth of shares.
It was then that, sometime later, an unknown trader named Keith Gill (also known as Roaring Kitty), who was just another YouTuber spreading his content, began to draw attention to a thesis similar to that of Burry. Shortly afterward, former Chewy (CHWY, Financial) CEO and founder Ryan Cohen bought around 10% of the company's shares, becoming its largest shareholder. Parallel to this, at a time of pandemic when trillion-dollar fiscal stimulus packages were being poured into the economy and an entire world population was locked indoors, a flood of new retail investors entered the market.
Fueled by commission-free brokers like Robinhood (HOOD, Financial), investing and trading were democratized and social media platforms like Reddit (RDDT, Financial) served as the stage for a kind of orchestrated trade to squeeze GameStop short sellers. The result was GameStop shares jumping quadruple digits in a few days in early 2021 along with a few other stocks, particularly those with a similar profile to GameStop, a legacy business struggling with the modernization of the industry.
What happened next was what any decaying business would do if its share price jumped: sell equity. GameStop raised around $1.67 billion worth of shares and used this amount to clear its debts and strengthen its balance sheet.
Over time, Cohen proved to be the activist investor he is, rising to the position of chair of GameStop's board, shaking up management and electing executives he trusts. After a few years of volatility, attempts to turn the business around and speculation about its future plans, he became the company's CEO, leading it to profitability for the first time since 2018 through severe cost-cutting measures.
But from the peak in January 2021 until April 2024, GameStop shares had lost more than 87% of their value. It turns out that just when you thought the story had gone too far and that the natural tendency was for short sellers to bet against the company until it became a penny stock again, in 2024 there was a new twist.
Gill, the same guy who initially sparked the GameStop frenzy, reappeared after more than three years in obscurity, announcing a massive bet on the video game retailer—around 5 million GameStop shares and 120,000 call options. The result? Another short squeeze, though on a smaller scale this time, with shares jumping almost 400% in just a few weeks.
This was the perfect opportunity for Cohen and his team to sell equity and strengthen the company's balance sheet once and for all. In May, GameStop sold 45 million shares, raising $933 million in cash. And they didn't stop there.
On June 7, after another massive surge, GameStop sold an additional 75 million shares, raising another $2.10 billion. Adding this to the company's cash balance, GameStop now has approximately $4 billion on its balance sheet with virtually no debt.
What's the plan for all this cash?
GameStop's unconventional management has revealed little about its future plans. However, the funds raised from equity sales may be used to transform it into a holding company.
According to quarterly filings, GameStop disclosed its board of directors approved a new investment policy. This policy gives the CEO and largest individual shareholder, which is Cohen, the authority to invest in equity securities and other financial instruments. In other words, it seems the strategy is to invest outside the core business, which makes sense given sales have been declining for the past five years.
Even so, the success of this strategy is uncertain. It will require a keen investment vision from Cohen and his team, akin to Warren Buffett (Trades, Portfolio)'s approach. Meanwhile, until more details about these new investment avenues are revealed, it appears the company's management will focus on operating efficiently, cutting costs and aiming for profitability, even if it is just breakeven.
Although this plan may sound unconventional, making a bullish case for it is not impossible. The major hurdle is that investors are currently paying a staggering multiple of 257 times enterprise value/Ebitda for this bet, which seems far detached from reality.
So why not short GameStop stock?
Right now, 10.70% of GameStop's float is shorted, which is a lot less than in recent years. This suggests two things: short sellers have learned from the past and the chances of a short squeeze are much lower.
The narrative around GameStop might also be shifting from “betting against” to “transformation and growth potential.” This could attract a different type of investor—one more focused on fundamentals and long-term strategies.
With the mystery of Roaring Kitty mostly resolved (and already covered this year), I do not think it will significantly impact the share price again. The most likely source of volatility would be related to Cohen's efforts to turn GameStop into a holding company, which, in my view, seems pretty dubious.
But more than anything, it is tough to bet against a stock with such a volatile history, a strong balance sheet (especially with all those equity sales), no debt and a business that is not losing money. This makes the idea of betting against GameStop based on extremely high valuations seem shaky, especially since valuations have mattered very little to the investment thesis in recent years.
Key takeaways
GameStop's transformation from a struggling retailer to a cash-rich contender is nothing short of remarkable.
The company has cleverly used equity sales to strengthen its balance sheet, positioning itself with solid cash reserves and minimal debt. As Cohen steers GameStop toward becoming a holding company, the future is a mix of uncertainty and potential. With short interest at a modest 10.70% (given its history) and the stock's swings tied to strategic shifts, betting against it now seems a high-stakes gamble. The strong financial footing and near profitability make the stock a tough target for shorts, adding a layer of complexity to any bearish bets.
