Why StoneX Expects GameStop Stock to Surge 40%

For years, GameStop (GME) was a retailer wrestling with falling sales and store closures. Then the meme stock frenzy turned the company into a headline machine. Currently, GME stock is valued at a market cap of $12.2 billion and is down 72% from all-time highs. 

On Monday, a Wall Street firm said it is time to look at GameStop’s underlying business again. Let’s see why. 

How GameStop is Changing its Business

Investors once knew GameStop as a struggling video game seller. The current version looks quite different as the company has shut down unprofitable stores, cut costs, and focused on higher-margin products, such as trading cards and collectibles. 

The old video game business continues to shrink. Now, GameStop is trying to turn its stores into hubs for the collectibles market, with card sales and authentication services.

GameStop’s partnership with PSA could unlock another revenue stream. Stores can serve as drop-off points for card grading, which could give GameStop an ongoing relationship with collectors, instead of a one-time sale when a new game launches.

StoneX Starts GameStop Coverage With a Buy Rating

StoneX initiated coverage on Monday with a Buy rating and a $33 price target, according to Seeking Alpha, which indicates an upside potential of over 40% from current levels. 

Analyst Mike Hickey gave credit to Ryan Cohen for rebuilding GameStop's earnings base. He also sees the collectibles business as another vertical of potential growth, GuruFocus reported.

Yorkville Ives has also turned bullish as it argues that GameStop is becoming a leaner collectibles and capital allocation platform. The bull case is about profit, collectibles, and how the company uses its capital.

GameStop Second Quarter Results Show a Profit Jump

GameStop’s net sales in fiscal Q2 fell 18.7% year over year to $790.2 million, from $972.2 million in the year-ago period. 

According to a company statement released Sept. 8, the drop reflects last year's Nintendo Switch 2 launch, planned store closures, and the sale of its France operations. However, operating income rose to $160.2 million, compared with $66.4 million a year ago. The company says that it was the highest second-quarter operating income in its history.

In Q2, selling, general and administrative expenses dropped to $187.1 million from $218.8 million. The sales mix also improved as collectibles revenue rose 57% to $356.3 million. It now accounts for 45% of total sales, compared to 23.4% last year. Moreover:

• Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was $174.0 million, up from $75.7 million.
• Net income was $298.7 million, up from $168.6 million.
• Adjusted net income was $161.1 million, up from $138.3 million.

The company also raised its outlook and now expects adjusted EBITDA above $650 million for the fiscal year ending Jan. 30, 2027, above the earlier outlook of $600 million. In the first six months, it has reported an EBITDA of almost $340 million. 

GameStop's $5.4 Billion Cash Pile and Lower Debt

As of Aug. 1, GameStop held $5.4 billion in cash, marketable securities, digital assets, and related receivables. It also owned about 43.4 million shares of eBay, worth roughly $4.9 billion.

Cash, cash equivalents, and marketable securities were $5.1 billion, compared with $8.7 billion a year earlier. On Sept. 3, GameStop completed exchanges that retired about $1.4 billion of its convertible notes due 2030 and 2032, which cut long-term debt to about $2.8 billion.

Noteholders will receive about 55.5 million shares and about $358.4 million in cash, which GameStop expects to fund with cash on hand. The company says no additional shares are issuable for the exchange.

Separately, GameStop's warrants expired at 5 p.m. New York City time on Oct. 30, and each carried a $32 exercise price. 

Risks to the GameStop Bull Case

GameStop remains a high-risk investment given that revenue continues to decline. The legacy gaming business remains structurally challenged, and GameStop's growing outside investments add another layer of volatility, 

The company also flagged one more issue. Participating noteholders may buy or sell shares, or adjust derivative positions. GameStop said those moves could raise or lower the stock price, and the effect may be material.

So what should investors watch? GuruFocus points to collectibles growth, operating margins, store economics, and capital allocation. The biggest question is whether earnings can keep growing while total revenue stays under pressure.

Out of the two analysts covering GME stock, one recommends “Strong Buy”, and one recommends “Sell”. The average GameStop stock price target is $32, above the current price of $24. 

On the date of publication, Aditya Raghunath did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.