My name is cameron. Stewart cfa. Thank you very much watch the channel. I greatly appreciate the all the subscribers all the viewership. I like comments down below. Ah, thank you. So much today we are going to look at gamestop. Gamestop has been blowing up recently, as the internet has gone after uh the game stock, to try to vanquish the evil hedge funds, who short it good luck to them, that’s, fantastic i’m glad people are getting the stock market i’m glad people are using technology to find Good companies they want to buy and then go buy them good for you. Uh, keep going, but i want to do, is take a look at gamestock historically and see what is the company’s financial system situation and why the hedge funds might have been short in the stock to begin with, and then think. Okay, maybe there’s a turnaround here and we can fix this company and grow and what would it take to grow to justify the current price that’s kind of what i want to do. I don’t need the the hate mail about uh ragging on game stack, that’s, not what this is about. I want to look historically why a hedge fund may have shorted it and then what, if anything, could be done with this stock to really produce a fantastic return? So let’s go dive into it. The first thing i want to show you is what behind behind me, is a bit of history, so this is volkswagen in 2008, which was the victim of a short squeeze much like gamestop, and at the time there was a heart.
There was a large short interest in uh in volkswagen, it spawned a giant buying spree which was the short squeeze, and it became one of the most valuable companies in the world for a single day only to come rocketing back to earth as the market settled out And eventually came about where it was uh, you know before the the pandemonium. So this is, i think, a little little rational, long term view of what can go on in the market from day to day and let’s. Try not to get caught up too much in the little flashing number that we see on the screen, but really we all work for our money every single day and if we’re going to put it to use what are we buying? We want to know that what we’re buying is going to last for a long time, so let’s take a look at gamestop and move right forward. So here we go here are the financials for gamestock over the last nine years, 2011 to 2019 revenues, 9.5 billion dollars to 6.4 billion dollars over this time frame, and you can see this is probably one of the reasons why it’s a negative growth rate, five percent Annually and it’s kind of being a victim of amazon right, it’s everything’s going online, i think they’re a little slow to transition, that’s that’s why they got a new cfo. A new ceo kind of out with the old in with the new let’s turn this puppy around and i, like those turnaround stories you if you saw my ibm video, i do like that opportunity.
So this is why i think one of the reasons you’re seeing selling pressure is the business model itself is being fundamentally threatened. The next thing is eba: does our measure of earnings right ebitda, 80, 840 million dollars to 111 million dollars in ebitda that’s a negative 22 annualized growth rate, pretty uh consistent over that period of time, i’m. Actually, frankly, i’m i’m shocked that the board of directors allowed the former cfo and ceo to to remain employed as long as they did. That is a that is an awful awful track record um. And when i look at the p l we can. We can look at it here now: um, actually and there’s there’s a lot of um costs in here that are really just hurting the bottom line: yeah so here’s, the p l for gamestop uh. You can see the 2019 fiscal year net sales, 4.6, 4.5 billion dollars operating loss, 400 million negative right, but there’s a write down a goodwill impairment of 363 million dollars, which was a charge, an expense for assets they had purchased. Historically, they were sitting on the balance sheet as assets when they looked at them and did an analysis. They realized well, these aren’t really worth what we have on our books. We have to write them down and that’s a one time charge. It did happen twice. It looks like a bad investment that they tested once wrote down tested again. The next year had to write it down again, which is also bad.
That could continue to go out in the future. I don’t i don’t know, but what i, what i do want to talk about here is this negative. 400 million is basically this write down. So you add this back. You get a zero which is zero earnings for the year. Um do the same thing in 28. They’Ve got a excuse. Me. 18 they’ve got 700 million dollars of a loss. I add back the almost billion dollar of write down. You get maybe 300 300 million dollar profit uh, but it’s all lower than it was three years back so it’s definitely declining, no matter how you slice it even if it’s, ebitda or operating profit with little adjustment, uh they’re, definitely having a problem. Let’S go! Look at the balance sheet and look at debt look at enterprise value and market cap here’s. Our debt debt has definitely increased recently as they uh. You know, as this type of a loss put such a cash squeeze on a business uh, that they really had to go out and borrow a little bit of cash to to to keep keep the fuel in the fire. And i think that’s also part money that they’re going to use for the turnaround that they’re trying to execute. They need cash to go. Do that if they have to go, buy something if they expand their their their leadership council hire new employees that cash will be consumed. Market cap shares outstanding times.
Price gives me market cap, and you can see this market is absolutely obliterated from 3.2 billion dollars to 259 million dollars. I think that’s a steal. Frankly i mean back yeah. I know that it’s it’s deteriorating, but at such a low price uh it it’s almost it’s. Almost worth buying just to throw a little cash at it, i’m surpr. I wish i would have bought it earlier. Quite frankly, enterprise value has fallen commensurately, even though that has expanded, and the enterprise value here is uh 13 times based on this falling ebitda and the debt level is 10x, so it’s, definitely a struggling company they’re going to have to raise both equity and debt. I i think um you know given where the stock has gone. I could see them selling stock into that to raise some cash couple. Other things let’s go look at the cash flow statement uh. So if we come back up here, just walk through this there’s some. I think there’s some good operating lessons here that we can apply to other businesses. So this is the cash flow statement. Uh remember. First, third is operating that’s what they generate their cash from the business. With this always starts with net income that’s the net income, you soften the other statement and it basically adds and subscribe subtracts what is or isn’t cash from this number. So the first thing you’re going to see is that goodwill impairment charge that we covered earlier right.
They add that right back because it’s not an actual cash cost, so this number goes up plus perfect. The other thing i wanted to bring your attention to is here merchandise, inventory a positive number, a very large positive. What does that mean? Basically, they’re selling, all their inventory and they’re, not rebuying it a normal cadence of a business you sell and you re buy, inventory and the negative, or this can be the positive of selling inventory. Turning inventory to cash is a positive number and the negative of buying more inventory to replace what you sell normally means that this number is a zero or, if you’re, growing, it’s, actually a slightly negative number, because you’re always buying a little bit more inventory than you’re. Actually selling, as you get larger and larger, but here what they did is they said: hey we need cash. Let’S start liquidating inventory, so stop buying only sell produces a positive one time. Large number. This is not going to be maintained. They’Re going to have to go back to something like this, where they’re buying to replenish all inventory but it’s a nice way to get up cash when you’re short and you need money right away in a business. Next thing is this number here accounts payable: this is their vendors. This is their cable bill, their rent, their employee cop, that necessarily not employee comp cause that’s that’s up to date. This is like uh legal bills, insurance all the vendors that they have to pay for product or for services.
This is the bill. That’S, like you, know, get the service it’s due in 30 days. The aggregate of all of those contracts is this number. So the reason it’s so large so negative is they bought down a lot of old bills? The cool thing is that’s, probably a one time deal because generally you have a pool of of bills that you owe you buy it down. You don’t have to buy it down every single year, it’s a one time hit to cash and it looks like they used some of all inventory to offset that and it’s part of their turnaround. They’Re, trying to clean the business up, they’re thinning inventory out they’re going to scale down units to find the most profitable retail locations. Keep those sell the rest, and i think what they’re doing here is they’re cleaning up the business, which is good good to do aside from that, there really isn’t a whole lot of extra cash. Now this particular year, they don’t make any money, that’s that’s minus 400 million dollars of cash that they lost it’s, essentially zero. If i take these two numbers back and add them back, it’s kind of like steady state, it’s, zero, free cash flow with a zero profit. Uh, but if they can fix the business there’s, actually some room there, which – which i kind of like, because this number is i’ll, go back to another sheet. We’Ll do cash! Now this number here the capex number that they that they have to put back in the business isn’t, all that big once they build the store.
I mean it. Doesn’T cost them much to build a store, but the store itself is fairly profitable, there’s a pretty good margin here, especially if you go back in time right. This capex doesn’t get that much bigger, but this number can can can vary widely if they’re selling a lot of product, so i would expect them to have to put some cash into the business, so this number is going to have to go up. I think, especially if they’re having to buy an online business or move the business online they’re going to take a lot of cash to do that. So i would think this number is going to go up, but there’s room here and the margin seems to be pretty wide. The debt here is kind of a wash because yeah they took on a lot of debt uh. You have no idea what they’re going to do in the future, not much you can do about that. The free cash flow number is largely negative kind of of a disaster. Again it’s turnaround it’s not going to produce cash. You can’t really value or buy it based on cash. What i do like, however, is the share reduction. Look at this. These guys have been chewing up shares if you bought a share back then you’re, one of 136 million shares and currently you’re. One of 66 million shares that is outstanding, that’s, a 10 drop. These guys have been generating cash for a long period of time.
Here yes, it’s declining, but it was positive and they had to do something with it, so they bought back their own stock. My opinion they should not have done that they should have invested into the digital enterprise that they’re now building after they’ve had this problem but that’s one of the problems. But it was neat to see them pull back a lot of their shares as i guess they thought they were severely undervalued. Their stock range here, in my opinion, was only really undervalued here. This rate was pretty fairly valued but that’s. One nice thing is there’s very few shares outstanding right now, um yield yield. I don’t think you can trust that uh, because the cash flow itself is so wonky. So what do we want to do with this uh? You know i can’t help but look into the market and say what is this company going to do? I have no idea, i mean to be honest. I look at this and say where’s the stock trading right now. I’Ve got 325 dollars per share, but the the way i would look at this is forget. Cash flow for a second uh forget the time list, let’s let’s say in 10 years from now. This company is going to grow that they are going to take their now new, robust stock price and they’re, going to sell equity into it to raise a little bit of cash, and i have them raising a billion dollars in this model by selling.
Just a few shares frankly at this price, they don’t have to sell that many. So i said they’re going to need an extra billion dollars to help them turn the business around the stock itself. I said they can sell it at 150. A share again. I have no idea where they would uh at what price they would be able to get this done because it’s so fluid. So i said 150 bucks. That means they need 60. 600. Excuse me: 6.7 million new shares to be issued it’s only about 10 percent. More shares than they currently have it’s it’s, not that big of a deal, but that extra billion in cash gives them a lot of money to do their turnaround, which is what they need. The next question is: what do we want to do with growth right? It can’t be zero. They got to do something they’re currently at a uh 111 million dollars of ebitda they used to be, they used to be back in the heyday 840 million, so they got to get back there at least. So. The question is: what ebitda do they need to be to justify the current stock price? So if i’m, here 325 i’m going to pay 325 i’m going to toss that up here and i’m, going to exit at some price we’re going to set this in a second such that over this time frame, i get a return. That is a market return. That’D, be a 10 return.
We’Re going to fix this in a second now let’s go do that. If i take this, my ebitda forecast and say okay, last year’s number is this kind of a fluke right they should they should get back to whatever they need to do. What rate do i need to assume if i said 10 annualized growth rate over here 20 times, enterprise value ebitda, less a little debt gives me a market price of 60. A share that’s well short of the current 350, 325, so i’m, going to move this up again. 25.25. That gives me a 186 dark price, certainly certainly a nice stock price, but still nowhere near where it is right now and that’s 25 annualized growth rate for a year, let’s go to 45, almost 50 percent growth every single year. That means ebitda is 3.1 billion dollars. In 10 years at 20, times gives me a 710 dollar price target. Now, let’s put this in our irr calculation. I buy the stock 325. I hold it for 10 years. There’S, no free cash flow because they’re investing everything in the business that they need to grow. To execute on their plan, they execute on the plan they get 3.1 billion dollars of enterprise. Excuse me of ebitda in 10 years you get a 20x multiple on that and you get your stock price with some other adjustments. I’Ll go back over that’s, seven hundred and ten dollars price. That gets you a nine percent irr, which is a market return.
So now what we’ve done is we’ve just used the math to produce a result now let’s smell check to see if we think the result is right or not, so we got a market return by buying the stock. Now we have a growth rate that we have applied 45 annualized to 3.1 billion dollars in 10 years. Is that possible sure anything’s possible? I think that’s that’s more than top line revenue, no, no yeah top line revenue at the heyday, and that falls to three. So about half of revenue currently that they need to produce in earnings in a decade. So the idea here is, i don’t know what the number’s going to be. Nobody does at this point. The stock is trading literally uh just on the ticket on the screen. I don’t think anybody’s buying it for a business case. What i’m trying to do here is make a business case to justify the price that’s in the market, and to do that, i believe you need to assume roughly 50 annual growth rate on earnings over a decade with long term visibility to about three billion dollars of Earnings out a decade and a decent ebitda, multiple, if that’s, what you believe is going to happen with the cash that they raise, the extra billion dollars of of cash of of shares that they sell uh that they have the job to do it, go for it. It’S a great deal if you don’t believe this this stock, this growth rate or you’d rather put your money into something else that has a more conservative growth rate.
Go. Do that as well it’s, a free market, you guys can do whatever you want, which i i absolutely love, and i support anybody. Who’S willing to step into the market put their hard earned money against any stock, go for it, that’s fantastic, this channel. What i’ve promised you and what i look for is the a grounding in actual cash flow that’s, how we value so, unfortunately, i’m, not going to be able to give this an opinion i’m going to give it a mat. Because, honestly, i have no idea where it’s going to go, that thing could go to a thousand, it could go, it could go ballistic, just like um volkswagen did. I have no idea and, as a result, i can’t put my hard earned money against it. I can’t certainly suggest that you’re doing the same. So what i’m going to do is i’m going to sit back watch what happens? I’Ll go, buy something like a lockheed martin or something else and eat. My popcorn collect my cash dividend and just wait for the market to fix itself thanks for watching gamestop. My name is cameron. Stewart cfa. This is rational. Investing if you like the channel hit the subscribe button. I got lots more videos coming up check out the channel for all the comments. Uh there’s lots and lots of great stock recommendations down below. Thank you very much.