The Great GameStop Short Part 2 – Robinhood and His Merry Redditors

Now that I’ve had some time to reflect on the events that are, for all practical purposes still unfolding. I figured I would address them more directly. The topic is certainly a complicated and multifaceted one

First, I see very few people in the right here. Yeah, it’s easy to pick on the big guy at the top. Easy to look at a few hedge funds and call them the enemy. A sort of symbolic stand-in for American capitalism. As someone displeased with the current corporate culture, I can certain empathize with their desire to strike the system however they could.

In many ways, I feel that the overconfidence and complacency of the professional traders set these events in motion. I mean, shorting more shares than actually existed? I reminds me of the same reckless abandon that led to the financial problems in 2008. In that case, the risky assets were creative mortgages presumed to be made safe because they were bundled together with a lot of other mortgages.

Given the far-reaching consequences of that particular disaster, the actions of the group exploiting the mistake seems… shortsighted. Of course, they have done a magnificent job of highlighting how little the professional investors have learned.

All this aside, I cannot but feel that the Robinhood brokerage has made itself public enemy number one as well. For a platform that claims to be all about bringing trading “for everyone,” they seem to have gone well out of their way to shut down the… financial protestors. Other brokerages took actions to restrict the trading of GameStop and other stocks as well, but none quite as severe as Robinhood, who went so far as to alter the rules for cryptocurrency as well.

Though the actions of the protestors are questionable, they are (probably) not illegal and they had a right to make really bad investment decisions for reasons that were allegedly not about profit.

Ultimately I feel that nearly everyone was in the wrong. The motivation of the protestors was commendable but ill-advised. The rhetoric was absolutely deplorable, and smelled more of vengeance and hatred than justice. The professional investors have learned nothing in the last decade and displayed a need for additional regulation. Several investment platforms have shown their true colors, when the chips were down.

I think I still need more time to absorb all these things. I try my best to judge slowly, if a bit harshly in this case. None quite as harsh as Robinhood, though. I’ve been using their app infrequently since early 2019. Unfortunately I feel rather strongly about some of their actions in the last week. They haven’t really impacted me personally. I happened to own one of the stocks of interest, though not one of the ones that’s getting any attention. I sold my shares of GameStop back in March because I was dissatisfied with some of their business decisions. It bothers me enough that I intend to sell all the assets I have on their platform and move my money somewhere else.

Y’all take care, and watch yourselves out there. The stock market is rather unforgiving to the impatient.

Gamestop – A Slow Motion Train Wreck

Almost two months ago, I went over GameStop’s Q1 earnings report. (link) It wasn’t good news, and their stock price had dropped by $3, roughly 35%, as a result. I’ve been loosely following the ongoing… situation… since then. Now that I’m posting again I’m going to run through some of the stuff that’s come up real quick so the topic will be “caught up.”

I vaguely remember them announcing a stock buyback program and apparently so many people signed up that they hit the cap and some people aren’t going to get what they expected. It ended a couple of weeks ago and the stock price has dropped another $1 and some change since, to around $4.11. Right around that time they announced a partnership with R/GA to “help reimagine the in-store experience.”

Among the things they’ve tossed around are the idea of in-store esports competitions, and purely retro-gaming oriented stores. I honestly don’t know if I’ve ever been inside a GameStop that had room for any manner of in-store competition, but I guess that’s the point of thinking outside the box, as it were.

The good news for GameStop is that the sales figures I quoted last time seem to be industry-wide. That is, hardware sales are down for the entire industry, not just GameStop, and they’re down roughly the same percentage. That suggests that GameStop isn’t entirely at fault. On the other hand, it reflects poorly on the industry as a whole, though I imagine there will be a large surge for the next console cycle.

It’s going to be a rough ride on the way there though. The first time I talked about GameStop was back in January when their stock price was close to $15 instead of $4. That means it’s dropped about $11 in six months, down roughly 70%.

They’ll more than likely be around for a good while yet, including the next console release. I would normally like to point out that businesses this size don’t tend to keel over quickly. They haven’t exactly rolled out mass store closings and/or layoffs yet, so it’s bad, but they aren’t exactly at death’s door. At least, they don’t appear to be.

I wouldn’t mind seeing one of their retro-focused stores myself. That might convince me to actually visit one of their stores again, so maybe they’re onto something.

Y’all take care, I’m sure you’ll hear about this again in a month or so when their Q2 earnings become available.

Gamestop – Q1 Lack of Earnings Report

Right… first things first, here’s a link to the report.

q1 marketwatch

And this is what their stock is doing, courtesy of MarketWatch.

Their stock price dropped like their new hardware sales, which declined by 35% also. That’s including the fact that Switch sales are still strong, so it’s PS and XBOX sales that got flushed.

That’s not their only problem though. New software is down (4.3%), Pre-owned is down (20.3%), and digital is down (6.7%). Accessories are “up” 0.6%, which is flat as far as I’m concerned, and collectibles are actually up 10.5%. To put some numerical perspective to it, the Q1 net income for last year was $28.2M USD. The Q1 for this year is $6.8M.

Their quarterly dividend is being halted immediately to save money and their current guidance is -5% to -10% sales. To be fair, the cutting of the dividend is a major reason why the stock price has dropped so hard, I imagine.

I mean, I’m at a loss. To borrow a word from the internet’s current slang, “oof.” This is… not a good sign for Gamestop. I get it, though. We’re now towards the end of the PS4/XBO life-cycle and most of the people that want one likely already have one. Anyone who doesn’t, well, may as well at least wait and see what E3 has in store, yeah?

Y’all take care, I just don’t know what else to say.

Gamestop’s Guaranteed to Love It Trial

Y’know, it’s funny sometimes how often we have to be reminded that we shouldn’t believe everything we see on the internet. See, I saw a couple of days ago that someone tweeted a picture of a document stating that you could return a copy of Days Gone within a couple of days for full retail value, issued as in-store credit. I thought it was really odd that this had no real impact on their stock price so I started investigating. When I went to Gamestop’s own twitter account, investor relations page, and even the web page for Days Gone, I couldn’t find any reference to it at all. Naturally I begin to suspect something fishy was going on.

Just for the sake of being thorough, I also googled it, which turned up several articles referencing this tweet, but notably also saying that they had verified this information to be accurate. Those were from Polygon and The Verge, so I’m willing to believe it’s accurate.

Honestly I think it’s a great consumer-oriented policy that isn’t exactly going to cost them a ton of money. After all, they get to keep their $60 and re-sell the game for another $45-50. I’m curious if that $60 will show up as multiple sales on the books too. Not really sure how they figure in sales using in-store credit vs “new money.”

Still, I hope it works out properly and they continue this practice. It would be a good way to help turn public opinion around, albeit very slowly, especially given the way game launches seem to be going these days.

I’m also curious why they haven’t really publicized it themselves. Seems a bit strange to come up with a cool new consumer practice in hopes people will be more willing to buy a new game then not bother to tell anyone about it.

Meanwhile, as I’m writing this, I’m getting pinged repeatedly that Nintendo stock is up some 10% today, presumably due to the news that they are going to try to market the Switch in China through Tencent. I don’t know how well it’s going to go, as they don’t even have approval yet, but new customers are new customers and that means more sales coming in.

Gamestop – 2018 Financial Report

And it’s not what I would call good news. Not that anyone expected good news. I certainly wasn’t. Press release here.

Q4 18 revenue (13 weeks) was a loss of 187.7M USD vs a 105.9 loss for Q4 17. Bit rough, but again, expected. The yearly though, shows a pretty rough state of affairs.

The 2017 fiscal year, ending Feb 2018 (53 weeks) had a net income of 34.7M while year ending Feb 2019 shows a net income loss of 673M. I was curious as to the large change. Net Sales dropped by 261.8, or around 3%, but it looks like most expenses also dropped.

The single largest line item, change, not present in the previous year, is a 970.7M Goodwill impairment. I’m still not super clear on what that is, but it seems to be the difference between the paid or previous value of an asset vs it’s newly assessed value.

“The difference between the book value and fair market value is recorded as a loss due to goodwill impairment in the company’s income statement.” – Investopedia

It is not immediate clear to me exactly which of their assets is currently considered “impaired,” as it’s not stated in this press release. I’m assuming they would have posted a net income otherwise? At least, that’s my impression after running the math for myself.

The part I found of particular interest were the individual categories of sales and how they’ve changed. The single largest source of net sales are in new software, which is actually down a little from last year. This is followed by new hardware, also down a little, and pre-owned which is down hard, some 13ish% from last year. Meanwhile, accessory sales,  at number four are up, as are collectables, while the remaining “digital” and “other” are pretty flat.

Makes sense in a way. Consoles are at a stable point in the hardware cycle, and presumably most of the people who would want one probably already possess one. On top of that, this category has the worst profit margin, 8.5% 1,767.8 sales to only 150 gross.

The large drop in pre-owned is interesting, though. As a consumer there’s a certain logic to it. The main reason why I personally used to go to Gamestop was to look through the pre-owned section and see if there was anything interesting that was reasonably priced. The last few times I’ve gone though, I’ve experienced several problems.

One is that the only console I now possess is a Switch. Nintendo games hold value so hard that pre-owned may as well be new. Two, I’ve found that I can find comparable deals online with more reliable availability that isn’t connected to specific retail locations. Heck, I know a used book store with better stock and deals than Gamestop, for all consoles, old and new. Having said that, despite being pretty low on the net sales category, pre-owned sales are a massive category of gross profit, pulling a 43.4% margin. So they aren’t taking in a ton of money, but the profit margin is leaps and bounds better than new hardware(8.5) and software(20.8), only outdone by digital sales with an insane 88.5% profit margin. Most everything else is around 30%.

Accessory sales being on the upswing makes sense too. I believe they mention specifically controller and headset sales. I’m operating under the assumption that the Switch is helping drive that, but honestly I’m so disconnected from the console market these days that I could easily be wrong.

I guess collectibles is a “good for them” category. I personally found the amount of kitsch to be bothersome. It felt like there were increasingly fewer games and more… stuff. Seems to be working for them though, so I guess it appeals to their target customer.

[You know, on further reflection and considering the people I’ve known that would use Gamestop, I’d say customer experience had a lot to do with it. The individual I have in mind pre-ordered from Walmart instead of Gamestop only one time, and that’s because it took him nearly an hour to make a single game pickup that would have been a five to ten minute in and out deal at Gamestop. I would say my experience in regards to call-ahead and pre-orders was similarly smooth.]

They didn’t really provide much guidance going forward, primary due to a new CEO taking over in a couple of weeks. I’m personally curious to see how they do going forward. At the very least it provides an interesting view into the nuts and bolts of the retail games industry and where the money is.

Gamestop – Revenge of the Shareholders

So, I haven’t mentioned much about corporations and stocks lately because I haven’t seen anything interesting flag up. This pattern was broken Thursday when I got a notification that Gamestop’s stock had dropped several percent, something that doesn’t typically happen for no reason. I wasn’t overly surprised by what I found when I looked though.

“While the outcome of the process was unfortunate, we believe that the Board has a tremendous opportunity to create value for its shareholders by returning significant capital to equity holders, and by hiring a CEO who is properly incentivized to focus on leveraging the Company’s competitive advantages and on improving operational efficiency.” – HCM Letter – Feb 12, 2019

One of their shareholders, Hestia Capital Management, sent them a letter suggesting that they do several things to at least correct their share price, which they believe is significantly undervalued, as well as raising it long term. The whole thing is about four pages, and I don’t intend to go over it point by point.

“However, the Board’s lack of a meaningful response following Hestia’s February 12, 2019 open letter to the Board (the “February 12 Letter”), (…) and Hestia’s considerable efforts to engage with the Board, have driven us to group together and speak publicly now.”

The recent drop occurred because not only did they not get the results they wanted, but now another shareholder has joined them in penning a second letter, Permit Capital Enterprise Fund. The irony is that both letters insist that the companies current value, roughly $11, is significantly less than what it should be based on the numbers, $19. This doesn’t seem to be inspiring investor confidence though, and they’ve expressed the opinion that if they don’t get the results they seek, they will work to replace the board.

“However, if this letter fails to elicit an acceptable response, we are prepared to take our proposals directly to stockholders and nominate directors for election at the Company’s 2019 annual meeting.”

One of the first charts in the new letter is a comparison of Total Shareholder Return between Gamestop, it’s “peers”, the S&P 500, and the Russel 2000. I personally am unsure that the companies listed as peers are a great comparison. It’s mostly specialty retailers, but I’m not super familiar with those industries, really, and feel like Gamestop may be facing a larger challenge overall than they are.

“Peer group used by GameStop’s Board in most recent proxy; group includes: Advance Auto Parts, Dick’s Sporting Goods, Abercrombie & Fitch, AutoZone, Barnes & Noble, Tiffany & Co, Foot Locker, The Gap, Bed Bath & Beyond, Williams-Sonoma, L Brands, Nordstrom, Kohl’s, Office Depot, Ross Stores and O’Reilly Automotive.”

Among that list, I only see one business that I think faces similar challenges to Gamestop, and that’s Barnes and Noble. Both companies are operating in an industry that is moving from physical goods to digital goods. The rest of these businesses deal in physical objects, as we have yet to invent non-physical shirts and transmissions. Of course, I may be overlooking details too, I’m way in over my head on this one.

See, I figured if the “average” Total Shareholder Return is 119.14 to Gamestops 42.49, then I should be able to calculate B&N by itself to see if it reflects the average or is an outlier more in line with Gamestop. This was somewhat more difficult than I had anticipated. First, this number is calculated with a known, assumed, or hypothetical investment amount over a specific period of time. It was fortunately provided in the source document “Value of $100 Invested on 2/11/14 as of 2/11/19.”

The value itself, unless I am mistaken, appears to be (Starting Share Value – Final Share Value + Dividends Paid) That’s a rough estimate I think, anyway. In this case it’s 100-57.4591+41.36, or -$1.18. I’m, uh, still not sure that’s correct. It took a good hour to figure out how to calculate it and locate all the requisite numbers.

This would appear to confirm my suspicion, though, that the companies listed are not a good measuring stick for the realities of Gamestop’s situation. I’m uncertain if the changes they want to make will ultimately have the impact they would like. It’s obvious that something needs to change, and maybe it’s the board members, maybe it’s just not a large enough market now to sustain a chain this size anymore. I… don’t shop there anymore. They have very little of interest or value to me personally. There was a time I could spend hours browsing here, but those days have obviously passed.

GameStop, Nvidia, and Activision Stock Stuff

It still feels weird, watching various gaming and tech companies rise and fall via share price. I’ve actually gone so far as to create an account over at this morning, where I’m slowly accumulating a list of companies I feel like monitoring.

This came about because both GameStop and Nvidia are in my headlines this morning for taking some manner of fall or another. According to my little watchlist ol’ Activision Blizzard is in the club too.

GameStop’s, though, is the most severe. They seem to have stopped looking for a buyer for the business and as a result their stock price is down somewhere around 25% overnight. It’s sad to watch, in a way, as I have some fairly fond memories of using GameStop, say, around 2012. We’ll see though, it’s not like they’ve gone out of business just yet. Maybe they’ll get their hands on a CEO and find some way to secure their market.

Nvidia seems like less of an issue to me. Their stock is down due to lower than expected sales during the holiday season. I get it, but the whole shares dropping because we made less than expected is a general pet peeve. Their 2018 Gross and Net Income are both up year over year since 2014. Like, a lot. Net income in 2014 was 630M and 2018 was 3B, with a B. Of course, people are people, I guess. It does look like 2018 over was a very flat year for them, quarter to quarter not much has changed. Makes sense though, I’ve been trying to delay major computer upgrades hoping prices would come back down. Maybe this year will be the year.

That’s another thing though. See, everyone talks about Q4 sales, holiday sales, and I get it, traditionally a lot of product moves during that time period. As a consumer, though, the holidays aren’t where it’s at for me. Yeah, some extra spending happens, but I simply don’t spend what some of my coworkers do on the holidays.

Maybe that’s just me though. In a wonderful show of shareholder confidence, AMD, the company I usually buy from, is also down due to Nvidia’s report. Neither case is really a big deal, I don’t think. Especially not compared to the drop they both experienced back in September.

Activision Blizzard is also down a little bit because an analyst changed their opinion of the stock from “outperform” to “perform.” So, y’know, whatever.

Unfortunately this sort of odd analysis doesn’t apply to everyone I watch. Both Valve and Epic Games are private, which means none of these numbers are collected in a nice handy place for me to look at. Apparently Koch Media has decided that Metro Exodus will be an Epic Games exclusive for it’s first year. I’m sure some money changed hands, as it seems to be doing a lot lately with Epic Games. I’m assuming that’s mostly Fortnite money being used to launch the EG Store.

I’ve seen people criticizing the EG Store for it’s use of exclusives as well. I’m admittedly not a fan of having a bunch of exclusive storefronts, and have expressed sentiments against them in the past. Valve needs some competition though, and this may in fact be required to establish themselves. Not that I think they will stop when they’ve done so.

On that note, I’m going to fade back into the swirling thoughts of capitalists and proletariats from which I came and get some “real” work done. Y’all take care.