CEO Ryan Cohen Is Turning GameStop Around, But Does That Make the Stock a Buy?

Key Points

• GameStop turned in strong fiscal Q2 results.

• The company is now solidly profitable and generating strong free cash flow.

• Meanwhile, it's sitting on a boatload of cash.

• 10 stocks we like better than GameStop ›

While GameStop (NYSE: GME) once looked destined to go the way of the dodo bird, CEO Ryan Cohen's efforts have led to a turnaround at the company. This was once again on display when the company reported its fiscal second-quarter results.

The resurrection of GameStop has been one of the biggest surprises in retail, perhaps only behind Build-a-Bear. When Cohen took the helm in the fall of 2023, the video game retailer was seeing multiple headwinds. Console makers hadn't released a new platform since 2020, and there was a shift to digital downloads and subscription models from physical games.

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There really seemed to be no reason for GameStop to exist anymore.

Turnaround

When Cohen took over, his first act was to reduce costs. He called for "extreme frugality," saying every expense needed to be looked at closely. These efforts could be seen in GameStop's Q2 results, as its operating expenses fell 19% year over year to $218.8 million.

However, companies cannot simply cut their way to success. GameStop is still feeling the pressures of the video gaming industry. In Q2, its game sales fell nearly 27% to $152.5 million, and while console and other hardware and accessories sales were up 31%, helped by the release of the Nintendo Switch 2, they were still down over the past six months.

Where GameStop has found success, though, is in the collectibles market. GameStop entered this market in 2016, but a deal with trading-card grading company PSA last year to become an authorized dealer and allow collectors to drop off cards at its locations to be sent off for grading has reinvigorated its business.

The trading card market for both sports and popular games such as Pokémon has taken off in recent years. Collectors are buying packs to chase rare cards and sending in both new and vintage cards to be graded. This helped lead to GameStop's collectibles revenue surging 63% in Q2 to $227.6 million.

Overall, GameStop's sales jumped 22% to $972.2 million. Adjusted net income surged to $138.3 million, or $0.25 a share, from $5.2 million, or $0.01 a share.

Importantly, the company is also generating cash. It produced $117.4 million in operating cash flow and $113.3 million in free cash flow in the quarter.

GameStop took advantage of its high stock price during its meme stock days to sell stock and raise a lot of cash. Earlier this year, it also continued to raise more cash, this time through a 0.00% convertible bond offering, meaning it does not have to pay any interest on the debt.

At the end of Q2, it had $8.7 billion in cash on its balance sheet and $4.2 billion in debt. It also owned Bitcoin (CRYPTO: BTC) worth $528.6 million.

Image source: Getty Images.

Is GameStop stock a buy?

Cohen has done a tremendous job of helping turn around the GameStop business. He slashed costs and leaned into the trading card market just as it was getting hot. It's now a solidly profitable company generating strong free cash flow.

Meanwhile, the company's valuation is not as ridiculous as it once seemed. It trades at a forward price-to-earnings ratio (P/E) of 34 times this year's single analyst estimate, and it has $5 billion in net cash and bitcoin on its balance sheet, equal to more than $11 per share. Exclude that, and it has an enterprise value-to-earnings ratio of about 14 times. Note, however, that the current consensus comes from only one analyst estimate, and the company doesn't offer guidance.

If the trading card market can remain hot, GameStop finds itself in a good position. The release of the Nintendo Switch 2 helped console sales this quarter and should be a tailwind into the holidays. Meanwhile, there should be a gaming console refresh in the coming years.

The bigger question is: What are Cohen's plans for his growing stockpile of cash? The Bitcoin investment wasn't a bad move, but that alone isn't going to move the needle. Make an investment in the right business, and the stock could climb. There have been rumors that GameStop could acquire PSA, but PSA has denied this.

At this point, the stock is worth considering as a small, speculative investment, given how well Cohen has proven himself.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool recommends Build-A-Bear Workshop. The Motley Fool has a disclosure policy.