Video game retailer GameStop (GME +0.77%) had quite a year in 2021. The company experienced some unique market action and applied an industrial-strength broom to its leadership team.
Is this new version of GameStop poised to beat the market in 2022 and beyond? Let's have a look.
What happened to GameStop last year?
The stock became the flagship of a meme-stock boom that revealed flaws in the stock market's trading system. The company took advantage of skyrocketing stock prices to bolster its balance sheet through a couple of stock offerings, raising $1.7 billion of sorely needed cash.
GameStop refreshed its boardroom and executive offices, installing new names everywhere. The entire board has been repopulated, placing activist investor and Chewy CEO Ryan Cohen in the chairman's seat.
Only three significant names have stayed the same among GameStop's top-level executives: Human Resources VP Lisa Keglovitz, Chief Information Officer Angela Venuk, and General Counsel Dan Reed. Everyone else is new, from CEO Matt Furlong to Brand Development VP Andrea Wolfe. Many of the new leaders come with e-commerce experience from Amazon.com (AMZN +0.81%) and Chewy, indicating a sharper focus on digital operations under this management team.
The stock started 2021 at roughly $17 per share, skyrocketing to $483 in January and falling back to $148 in December. That chart would make a fantastic blueprint for a thrilling roller coaster.
Things have changed, but what's next?
It's hard to tell whether GameStop is doing enough to revamp its struggling business operations. The company rarely updates investors on its strategic direction, and executives aren't participating in Wall Street's conference circuit, where leaders often share the details and nuances of their long-term thinking.
Earnings releases are bare-bones presentations of raw financial data nowadays, devoid of management discussion. And even the quarterly earnings calls have been short and snappy in the Cohen/Furlong era. Here, GameStop hasn't addressed any questions from financial analysts in recent quarters.
What we do have is a high-level strategy statement from Matt Furlong in December's third-quarter earnings call.
Our emphasis on the top line stems from our leadership team's significant e-commerce experience and believe that revenue growth is critical. We believe revenue growth will translate to scale and market leadership. And from there, scale and market leadership will translate to greater free cash flows over time. Our focus on the long term means we will continuously prioritize growth and market leadership over short-term margins.
Image source: Getty Images.
Is that plan good enough?
What Furlong described in that statement is a classic growth-stock arrangement. Massive revenue growth now will translate into equally impressive profits a few years down the road. Spend money now to make money later. You know the drill.
In particular, I think GameStop could learn important lessons from Netflix (NFLX 0.42%). The media-streaming veteran focused on the same revenue-growth goal amid negative earnings and cash flows for many years, as its shift toward original-content production took place.
In Netflix's case, that was absolutely the right idea, and the company has now started to reap the long-term financial benefits of a high-quality content portfolio entirely under the company's control. As a result, Netflix stock has delivered an awe-inspiring return of 5,090% since the early days of the in-house content project despite a long string of negative free cash flow reports along the way.
NFLX Free Cash Flow data by YCharts.
The thing is, I don't see a fundamental revamp of GameStop's core business happening here. That's what it will take to create financial gains and shareholder returns in the Netflix mold.
Chairman Ryan Cohen has talked about abandoning the company's network of physical retail stores in order to refocus on e-commerce and cloud-based gaming services. But store closings have actually slowed down under Cohen's strategic guidance, and I don't see an all-digital GameStop revival on the horizon.
GameStop is still a damaged stock
If GameStop's new leadership is serious about shaking up the company's business model, the stock might one day become an interesting investment again. Until then, buying GameStop stock is just a speculative gamble on brighter days ahead -- with a stock trading at unreasonable prices. GameStop's market cap is above $8 billion, comparable to the glory days of physical stores in 2008, when the gaming consoles of choice were the PlayStation 3 and Xbox 360.
I'm not ready to see GameStop as a serious investment yet. Ask again when the stock price is far lower or the company's digital ambitions become clearer -- preferably both. The downside risks are much clearer than the upside promise right now.
