GameStop: Positive Cash Flows And… Bitcoin

Summary GameStop has significantly improved its cash position and reduced debt, strengthening its financial stability. Q1 results highlight material operational improvements in the cash flow, yet still a shrinking business. The company’s recent accumulation of Bitcoin puts it in a similar camp as MSTR now, vying for “BTC yield.” Despite some positive aspects to Q1’s results, I remain cautious about the long-term outlook with its crypto focus. When I covered GameStop ( GME ) last August, I spoke to its strong cash position, as well as, efforts to eliminate debt and mitigate cash burn in its surviving brick-and-mortar retail business. Impressively, GME has made material improvements, visible in Q1’s results that came out on Tuesday. Curiously, the accumulation of Bitcoin ( BTC-USD ) is a new part of this story. In fact, it may just be the story now. Given the development, the premium to book value, and the trickiness in finding a discount for a soon-to-be crypto portfolio, I rate the stock a Hold. Summary of Previous Thesis Last time, I talked about the situation with GameStop’s declining, brick-and-mortar business. Screenshot from previous thesis While revenue decline had stabilized, GameStop still had a cash burn problem. With the 2021 short squeeze providing essential capital, they were able to retire their debt and shift from interest expense to some interest income off of the $1 billion they had leftover. Ultimately, I concluded: The fundamentals show a tale of decline, and there’s no obvious strategy to steer this company toward sustainable, positive cash flows. Unless a huge discount opens the door to some cigar-butt investing, I don’t see GME being investable. Q1’s Financial Results The first thing to mention with GameStop’s Q1 2025 results is that they achieved free cash flow, compared to the prior-year quarter. Cash Flow Statement (Q1 2025 Earnings Release) This was achieved by finally generating positive operating cash flows. Generally speaking, this would be a sign that the ship has righted itself. Balance Sheet (Q1 2025 Earnings Release) For example, much of this simply entails monetization of inventories, which were also down YoY. Similarly, not the rise in assets held for sale. GameStop is continuing to shrink the business, selling its weaker assets to reduce cost, such as all of those in Canada . Balance Sheet (Q1 2025 Earnings Release) This is further evidenced by the YoY decline in property & equipment, as well as lease right-of-use assets. While the cash flow statement alone suggests free cash flow in the range of $600M to $700M is possible annually, this isn’t sustainable for a retailer with a shrinking balance sheet of inventories and retail locations. Some may also have noticed that cash grew from the $1B I mentioned last time to over $6.3B currently. Obviously, this level of cash flow didn’t create that much extra. The increase mostly owes itself to ATM offerings that occurred later in 2024, and that is something that deserves its own focus. Capital Raises and Bitcoin While the company made a series of ATM equity offerings over the last several months, the intentions for these offerings were not clear, merely described as being for general corporate purposes, such as acquisitions and investments. In March, their intentions to purchase BTC were announced, with a confirmation in the link I provided earlier indicated that 4,710 BTC had been purchased. BTC 6M Price History (Seeking Alpha) They did not disclose their cost basis per BTC, and this was not disclosed with Q1 results, as it occurred in the second quarter. Market prices at the time suggest that as much as $490M was spent on this, indicating that much more cash exists for future purchases. Cash Flow Statement (Q1 2025 Earnings Release) One thing that does appear is cash raised from a private convertible debt offering . The issue bears no interest, effectively an equity investment with the principal recoverable to the investor. The announcement came with more clear intentions than the ATM offerings of 2024: purchase of BTC. As this was only about a third of the offering, it stands to reason that more yet will be purchased. MSTR Q1 2025 Presentation This is a technique we’ve seen elsewhere. Strategy ( MSTR ), under the leadership of Michael Saylor, has developed the method of using his company’s own stock as a form of leverage to purchase BTC, in order to generate enhanced returns that he calls “BTC yield.” The slide above describes the use of convertible issues to accomplish this. MSTR Q1 2025 Presentation Strategy even seems to have given GameStop an official nod for doing so, acknowledging them in their Q1 2024 investor presentation. I’ve covered MSTR as well. In my February thesis (titled, It Just Doesn’t Make Sense ) I questioned the reasoning behind this approach. With MSTR trading at a premium to its BTC portfolio’s value, I wondered why investors looking for crypto would purchase it, instead of the BTC outright. While I can kind of see the argument from Strategy’s perspective, using their equity as a form of leverage, this also just adding to the risk of holding BTC. In that piece, I concluded: Without a source of earnings…to support this BTC accumulation, it’s not clear why those who believe in BTC would aim for MSTR instead of buying the BTC directly. It just doesn’t make sense to me. While GameStop does have earnings, for now, in the form of free cash flow, it seems increasingly likely that this won’t last, and so the thesis for GME is effectively the same as that of MSTR now. Valuation With that said, we’re looking at a market cap of about $13B for $30 per share recently. This compares to a balance sheet with common equity of about $6.5B, if we ignore the convertible debt balance and just assume it converts. Fully diluted, therefore, book value per share should be about $13. Similar to MSTR, GME trades at a premium to its balance sheet, which will soon consist of BTC holdings to a large degree, without any indications that organic earnings will grow to contribute to this upside. That isn’t saying that earnings growth won’t occur, but if one takes the assets plus potential earnings, I think the best we can say is that GME is fairly valued. There’s not a discount before with these financials. Conclusion When I wrote last year, I didn’t expect GME to start mimicking the peculiar approach of Michael Saylor, but I guess it’s another thing to make 2025 an interesting year. Even if they achieve “BTC yield” exactly as Saylor has for MSTR, growth is priced in, and folks believing in Bitcoin (and wanting the benefit of its liquidity) might just do better buying it directly. For that reason, I consider GME a Hold.

Source: Seeking Alpha