GameStop Will Stop Your Earnings

In this episode of MarketFoolery, Chris Hill talks with Motley Fool Asset Management's Bill Barker about some market news. Remember all that talk of Microsoft and Apple being huge at their trillion-dollar valuations? Saudi Aramco vaulted over that hurdle and then some with its IPO.

Meanwhile, GameStop (GME 0.10%) and Children's Place (PLCE 1.21%) both fell some 20% on earnings, but one of these companies looks a lot more promising than the other -- say what you will about malls, but children will probably still exist in the next five to 10 years. Plus, Bill and Chris pay homage to the '80s classic Wall Street on its special day. Tune in to hear more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Dec. 11, 2019.

Chris Hill: It's Wednesday, December 11th. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, the one and only Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: We have a rough day for specialty retail. We have an anniversary for Wall Street. We're going to start with the IPO of the day. And not just any IPO, ladies and gentlemen -- the most valuable public company in the world is now available for your investment dollars. Saudi-Aramco went public. Closed up 10% on the IPO at a U.S. equivalent of more than $9 a share. The market cap for Saudi-Aramco is now somewhere in the neighborhood of $1.8 trillion. So, for all the talk that we've done about Apple being a trillion-dollar company, and Microsoft, they are very much in the rearview mirror in terms of market cap.

Barker: Yeah. It'll be interesting to see, perhaps, how the stock plays out over time. Of course, it's being supported at the moment by behind-the-scenes support from those that want to keep in favor with the Saudi government and royal family, which is, essentially every business in Saudi Arabia is kind of obligated to be a partial owner of these shares, I think.

Hill: I mean, obligated? Or it's like, "This is a no-brainer. We're not saying you have to, but come on."

Barker: [laughs] It's kind of like booking a hotel room at the Trump hotel. You want to do business with this government? This is how you play the game.

Hill: There are a lot of hotels you could stay at.

Barker: There are a lot of other stocks you could own.

Hill: But here's an easy way ...

Barker: Let me offer you one of the alternatives that you might wish to consider, which is to get behind this business.

Hill: So, this also comes on a day when Chevron is in the news, because Chevron had a $10 billion writedown because the price of natural gas continues to fall. You and I were talking a little bit earlier today. Yes, it's this huge IPO, Saudi-Aramco. Overwhelmingly the biggest public company out there. Is this a business to look to own for the next 10 years? This also comes on a day when Time Magazine came out with their Person of the Year, and its Greta Thunberg, the climate change activist.

Barker: Yeah, it's an interesting question, how long fossil fuels can maintain their centrality up against what is a growing acceptance that they need to be reined in, in order for the climate not to ultimately kill all of us. Wherever you stand on that issue probably informs where you would bet on how the next 10 years will play out. But I think 10 years from now, things will be more challenging than they are today for Saudi-Aramco.

Hill: Shares of both GameStop and Children's Place are falling 20% this morning. Both companies issued third quarter reports. Children's Place posted a profit, but overall sales were weak. Their guidance for the full fiscal year was also weak. GameStop was a disaster. I mean, the expectation was that same-store sales were going to fall around 14%. They fell 23%. We'll get to GameStop in a second. When you look at Children's Place, what stands out to you? Because there have been moments in time where this has been a decent stock to own. Not necessarily setting the world on fire. It's also one of those businesses that appears to do a pretty good job with their merchandise.

Barker: What stands out to me is that they're still based in malls, and that that is a very challenging place to be. OK, as compared to GameStop, the threats to their business model are not as great. That is, there are still children, and they are still going to be wearing clothes. That is a reasonably predictable thing that isn't going to radically change in the near term. Their same-store sales are, generally over the last couple of years, mildly positive, 4%, 5% range. Not bad after some challenging years preceding that. They started getting a few things right.

But, they're in malls. This is not where you want to be growing your business. They've got some challenges in how they're going to react to the pressures that are going to continue to appear for most of their stores.

Hill: I'm not saying they should do this every quarter, but I would love it if, once a year, company management on the conference call used that line. "Good news. There are still children, and parents are still clothing them."

Barker: "We've looked into it. There are going to be children next year. We're cautiously optimistic about 2021 as well."

Hill: "Our public affairs team has looked into every state legislature, there are no pending bills in any state legislature mandating that children roam naked around the countryside."

Barker: "We understand cloning is coming, but they still have to go through the baby phase. Despite what you're reading and seeing out there, you can't just have a 10-year-old, a 20-year-old. Cloning doesn't work that way, people."

Hill: "Yeah, come on, get it right."

Barker: To spend a lot of time on the conference call on that would be great.

Hill: [laughs] Here's my question about GameStop. And I will preface this with a couple of data points. This is now ... this is now --

Barker: [laughs] You needed an extra breath! "Gotta steel myself for what is about to come." [breathes loudly]

Hill: Despite the overwhelming and growing popularity of video games, GameStop is a retailer with more than 5,700 physical locations worldwide, and a market cap that is now under $500 million. So, we're valuing this business at roughly $90,000 per location. And unlike Children's Place -- you can look at a five-year chart of Children's Place and say, it's not a great stock, but it's basically flat over a five-year period. GameStop is down 85% over the last five years. Here's my question: is this a business that is so odious that even activist investors want no part of it whatsoever? I'm not an activist investor, but I could just say right off the bat, "Hey, you might want to close some more locations. You might want to get to, say, let's just call it, under 4,000."

Barker: I think an activist investor would have to take a closer look at the balance sheet because there's not a tremendous amount of debt here. They've been paying down debt. They've also, at first blush, I think, confusingly been buying back shares. Now, that is literally returning money to shareholders. Shareholders are giving their shares back to the company, the company is giving shareholders money for those shares, and that supports the price of everybody who remains a shareholder to a degree. I don't know, I think I'd rather dividend that money out, if that's what you're going to do, because that gives more money to all shareholders, rather than the departing ones.

I don't know what the best version of the future of this company is. They're suffering right now. I really loathe using the metaphor of a perfect storm, so I'm not going to. I'm just going to point out that I loathe that metaphor.

Hill: Duly noted.

Barker: They're confronting a number of things simultaneously which do not add up to perfection, but add up to a big challenge. One is, they're in malls. Of course, that's already known. There's nothing new to that. The gaming consoles are turning over next year. So we're a year away, and they're going through a period right now, which is when they need to make a whole lot of their sales, which is the Christmas season. And they're not going to, because people aren't buying new consoles this year. So, their same-store sales are off, in the hardware category, what was it, 40%? Because nobody's going to buy the old versions of things when something new is coming out, but it's not coming out for nearly a year. So, they have to wait around, hope that next fourth quarter, Christmas season, they get saved by this. That's a long time to wait around. And in the meantime, probably the biggest part is that people just aren't going to be buying physical games the way they have. They're turning more and more to streaming them. So, they're challenged by where the business model is going, which is toward streaming where they are, which is malls, and also what might be a one-time thing, which is a gap in the hardware sales that drive a lot of new sales.

Hill: So, we're basically seeing what played out with Blockbuster Video and movies over the past 20 years play out in the gaming space. I'm wondering -- I don't expect you to have an answer to this, but I'll ask it anyway.

Barker: 18. Oh, a correct answer? A relevant answer?

Hill: Do you think any executive at GameStop five years ago, four years ago, used that example? "Boy, do you see what happened to Blockbuster Video? And the way movie streaming and TV streaming went online with Netflix? It kind of seems like that wave is starting in our business, which is video games. Should we do something about that?" "No, let's just keep the 6,000 locations we have."

Barker: Somebody did, but he or she was not listened to, and has subsequently departed the company for greener pastures. But, yes, somebody -- obviously, this isn't rocket science, that this was the way things were going. Netflix could have been GameStop, had it not recognized early what was going to happen if they didn't get all-in on streaming.

Hill: Do you think anyone buys either of these companies? I could see an acquisition of Children's Place if they put up a couple more quarters like this. Again, they've got quality merchandise, there's a decent brand association there. I can't imagine someone coming in and saying, "Yeah, we need to buy GameStop."

Barker: Yeah, I would buy Children's Place above GameStop, because of the whole children thing. Children looks better than physical copies -- because those are just going to be completely gone in a generation, right? Whereas kids, we think, will still be around.

Hill: And clothes, presumably.

Barker: Could go either way on that. Presumably. At least for warmth.

Hill: [laughs] Well, there's that, but also, the clothing of the future, as I've been told, is just going to be --

Barker: Foil.

Hill: -- foil, and a giant onesie.

Barker: Yes, in silver.

Hill: Look, if you've seen the movie WALL-E, you know how this is going to play out.

I mentioned a Wall Street anniversary. I am referring to the iconic film Wall Street, which was released 32 years ago today, and I would argue remains one of the all-time great movies about business, investing, finance. Even if you're just sitting someone down today, presumably someone younger, to watch the movie, they're probably going to point out things like, "Why is Gordon Gekko's mobile phone the size of a shoe box? Also, why are the stock quotes in fractions?" It's like, "Well, back in the 1980s, and even in the 90s, with the fractions, that's how we did things."

Any thoughts on this film? You must have something.

Barker: I read through the Wikipedia page to learn a lot of interesting facts, if you remember the movie and want to learn stuff about it. One of which was, this is to date the only movie -- at least according to Wikipedia, which is always right -- to win both an Oscar and Razzie.

Hill: Oh, really?

Barker: Yes.

Hill: Most people are probably familiar with the Oscars, the Academy Awards, the peak of awards, I would argue in film. The Razzie, short for the Golden Raspberry, which goes to essentially the worst performances and the worst movies. If memory serves me correctly, Daryl Hannah won a Razzie for her role in Wall Street.

Barker: That is correct. There's a little bit of backstory on her difficulties with the role and her idealism and activism not really lining up with the character, and whether Sean Young should have taken over the role, and her pursuit of trying to take over the role while the film was going on. If you're interested in that kind of gossip and want to make bets on which parts of it might or might not have been true ... I can see that. I can see Sean Young being difficult on the set, as she is reported to have been, and difficult walking off the set, with, apparently, all of her costumes. Keeping them. A rumor. Reported on Wikipedia. No one knows.

Hill: The great Michael Douglas Gordon Gekko speech, the greed is good speech. Even if you haven't seen the movie, you're probably familiar with that phrase, and just the picture of Michael Douglas as Gordon Gekko.

Barker: A lot of people don't know that before the movie, greed was not good. And then after the movie, turns out, greed is good.

Hill: Turns out it's good.

Barker: Sort of a documentary.

Hill: But, you go back and watch that scene, and actually, he makes a point in his speech that very much lines up with The Motley Fool way of investing. And it's this -- he's giving the greed is good speech at an annual shareholder meeting of Teldar Paper, a fictional company --

Barker: Which, Blue Horseshoe, as it turned out, loved.

Hill: Blue Horseshoe loved. Blue Horseshoe not loving GameStop or Children's Place, but Blue Horseshoe loved Teldar Paper back in the day.

Barker: Teldar Paper, one of the conference rooms in our old space.

Hill: We'll get to that in a second. But the point he makes is, when he's pitching shareholders on his plan, he makes the point that the executives at Teldar Paper don't have a stake in the success of the company. They're very well paid, but collectively, they own very little stock. That absolutely lines up with one of the ways we look at investing here at The Motley Fool. We like to see, all things being equal, our incentives as individual investors lined up with that of company management, and vice versa.

Barker: Yes. It's disingenuous in that he then is revealed during the film to not have any interest in actually sticking with the company, and his ownership of the shares does not translate into his actual concern for the company. But it's a good line, a good play, and effective within the movie.

Hill: Do you want to share a couple of the other conference room names in the old working space of Motley Fool Asset Management? I thought, you go to different companies, you can name your conference rooms whatever you want. At The Motley Fool, we like to have themes around our conference room names. On this floor, the fourth floor, where we are, all the conference rooms are named for famous investors. There's a Jack Bogle room, there's a Peter Lynch room, Buffett, etc. When it came time for Motley Fool Asset Management to name different rooms, you guys want with a different strategy.

Barker: It was to name conference rooms and various rooms after companies that appeared in movies and were publicly traded, optimally. We had to stretch that a little bit, but there was Devlin McGregor. We all know what happened with Devlin McGregor stock. In fact, we'll cover that on a future show, perhaps.

Hill: [laughs] We just might.

Barker: And Teldar Paper. Soylent, of course.

Hill: The kitchen.

Barker: The kitchen. [laughs] That was a little dark.

Hill: It was a little dark! I think the office supply room was Dunder Mifflin.

Barker: Yes. And we had one that was a reference to Office Space.

Hill: Innotech?

Barker: Innotech, yes, was where some of the hardware was stored.

Hill: Strong. I think we're done.

Barker: Are we?

Hill: Oh, yeah.

Barker: [laughs] Did we have any other stories? I can't remember.

Hill: No, I don't think so, unless, if you had more tangents you wanted to get to, we could do that. Otherwise --

Barker: Well, I did, but nobody who's listening to this wanted to hear more tangents. Thanks to everybody that contributed some of the ideas for the Christopher Hallmark piece. Outstanding work.

Hill: Oh my goodness, the dozens of listeners weighing in with emails and on Twitter with some tremendous ideas for a hallmark Christmas movie that will never, nor should ever, be made. But, thank you.

Barker: Maybe. There's a great script going around town, which really fills in some of the details on how Christopher Hallmark finds love. People are raving.

Hill: [laughs] See, I like to think that, in the way that people think, "Gosh, if I was a billionaire, I'd start a foundation for this charitable cause that I care about," or, "If I was a billionaire, here's what I'd do for fun. I'd buy a minor league baseball team and I'd have fun." I'm thinking that if you were a billionaire, you'd say, "You know what I'd do? I would finance the production of insane Christmas movies that I write."

Barker: I was thinking that maybe you'd go with, maybe Christopher Hallmark was also a philanthropist, on top of his four other occupations. [laughs] He secretly is very wealthy, but that isn't revealed until the end, which is a romcom staple.

Hill: Absolutely. Bill Barker, thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.