GameStop Corp. (GME, Financial) is in the news again following its four-for-one stock split last week. The move made its shares more affordable, but the concerns surrounding its future outlook and fundamentals limit its appeal. The original meme stock faces many challenges as it hopes to regain its past glory, which is why it is an unattractive bet.
The retailer had a relatively strong showing during the first quarter. However, that may just be a flash in the pan considering the competition it faces and the changes in the gaming industry. Its diversification efforts may not be successful due to the strong competition across its online and physical sales channels. Moreover, the launch of its Ethereum wallet is unfortunate as crypto market sentiment is at its lowest.
As a result, GameStop is not a stock for the long haul until it meaningfully turns things around.
Recent revelopments
Other recent developments have also had an impact on GameStop.
The first was the replacement of its chief financial officer earlier in July, which was odd considering how the company has done over the past several years from a financial perspective. Up until April of this year, it had a whopping $1.1 billion in cash with just $36 million in debt. Management did an incredible job of capitalizing on the retail trading frenzy.
Perhaps the concern for GameStop was its pivot into other business verticals such as blockchain gaming and non-fungible tokens. The company has been losing money for the past four years, so moving into new markets and exploring new opportunities was imperative. GameStop has so far failed to adapt to the trends in the gaming sector, which is why its fundamentals have taken a beating.
Furthermore, the company announced a four-for-one stock split, which became effective on July 22. While stock splits do nothing to impact a company's performance or ownership percentages, they help shares become more affordable for investors. The day prior to the split, shares of GameStop closed at $153.47; they are now trading around $33.81.
Worrying business outlook
GameStop's business has been struggling for several years, and the cracks have begun to show. It is now trying to turn its business around and regain its position in the gaming industry.
It reported a large net loss for the holiday season, its biggest quarter of the year. The company's losses carried over into the first quarter of 2022 as well, recording a net loss of $157.9 million. Moreover, the retailer experienced a rapid increase in its cash burn as it built its NFT wallet and marketplace.
Furthermore, GameStop's management team has talked a big game on how it plans to transform the business. However, the specifics are still unknown while the market gets saturated with new competitors. Moreover, according to NPD Group, video game spending dropped 8% during the first quarter. Therefore, things may not be looking too good for those betting on GameStop's triumphant return.
Furthermore, the gaming industry has evolved over the past several years, further complicating things for GameStop. Digital purchases have taken over, effectively removing the need for an intermediary. Moreover, the resale market is also threatened as you cannot trade in digital games.
The bottom line
GameStop's meme stock status helped take its share price to the moon. However, over the past year, the stock has declined vociferously amid market headwinds. Though its plans to move toward other markets in hopes of sparking a major turnaround have long-term potential, it is tough to wager on now. While the stock split makes it more affordable to individual investors, only time will tell if the company will find success.
