Over the past two years, GameStop (GME -2.40%) has drawn a ton of investor interest, becoming the quintessential meme stock in the process. Chairman Ryan Cohen and CEO Matt Furlong -- both appointed to their positions last year -- are pursuing growth by expanding the company's merchandise lineup, investing heavily in e-commerce, and launching a new non-fungible token (NFT) marketplace and other crypto-related ventures.
Cohen and Furlong have marketed GameStop stock to investors as a transformation story. But the reality on the ground looks a lot different. GameStop is a slowly dying retail dinosaur, just like it was a few years ago under its previous leadership team.
GameStop keeps making noise
During 2022, GameStop has started trying to make a name for itself in the crypto world, with a particular focus on NFTs. In February, it announced a partnership with Immutable X to collaborate on the NFT marketplace that GameStop was developing.
GameStop subsequently launched a digital asset wallet in May and opened its NFT marketplace in public beta form in July. And just this week, the company announced a new partnership with the U.S. branch of crypto giant FTX, spanning e-commerce, online marketing, and gift card sales.
All these initiatives are brand new, so it's too early to know for sure what they mean for GameStop in the long run. That said, management hasn't given investors any information to suggest that they can move the needle for the struggling company. Moreover, the NFT marketplace's transaction volumes have been underwhelming, aside from a burst of activity in its first few days.
Another bad earnings report
Meanwhile, GameStop's core business is still rotting away. Three months ago, the company reported a huge loss for the first quarter, but at least sales grew 8% year over year. GameStop had an easy year-over-year comparison to thank for that revenue growth, but growth of any kind allowed management to claim that things were moving in the right direction.
By contrast, GameStop recently reported that second-quarter sales fell 4% year over year to $1.14 billion. This fell short of the analyst consensus by over $100 million. And while the company didn't lose quite as much money as it did a quarter earlier, its adjusted net loss nearly doubled compared to Q2 2021, reaching $107 million.
Thus, for all of its investments in new fulfillment centers, new call centers, and new product categories, GameStop remains a business in decline. Moreover, low-margin hardware sales now account for a greater proportion of the company's revenue than was the case before the pandemic. That will make it especially hard for GameStop to return to profitability.
GameStop revenue and net income, data by YCharts.
GameStop has (some) time
On the positive side, while GameStop has burned over $400 million in the first half of fiscal 2022, it still ended Q2 with $909 million of unrestricted cash and cash equivalents. As working capital headwinds subside, cash burn could slow further, giving the company a couple of years to turn things around before it would potentially face a cash crunch. (GameStop also might look to issue more shares to bolster its balance sheet if the stock price remains high.)
Unfortunately, time isn't likely to cure GameStop. In its heyday, the company's bread and butter was selling physical game discs, especially used games. The long-term shift toward digital downloads has eviscerated that revenue and profit stream, and GameStop hasn't found anything to replace it.
GameStop has started looking to cut costs, tacitly acknowledging that its growth investments haven't paid off. Looking forward, management faces an unappealing choice between dramatically shrinking the company's store base to radically reduce costs (leading to lower revenue), or trying to soldier on with thousands of stores in the hope of growing revenue (leading to heavier losses). Either way, GameStop stock seems likely to continue its fall back to earth in the years ahead.
