GameStop Corp (GME, Financial) recently experienced a daily gain of 4.4%. However, over the past three months, the company's stock has seen a loss of 21.08%. With a Loss Per Share of 0.68, the question arises: is the stock modestly undervalued? This article aims to provide an in-depth analysis of GameStop's valuation, encouraging readers to delve into the subsequent financial assessment of the company.
Company Introduction
GameStop Corp is a prominent multichannel video game, consumer electronics, and services retailer in the U.S. The company has a significant presence across Europe, Canada, Australia, and the United States. GameStop sells new and second-hand video game hardware, physical and digital video game software, and video game accessories, primarily through GameStop, EB Games, and Micromania stores and international e-commerce sites.
The company operates two main business segments: Video game brands and Technology brands. The technology brands segment sells wireless products and services and operates Spring Mobile managed AT&T and Cricket Wireless branded stores, along with the Simply Mac business. The company's current stock price is $19.23, while its GF Value, an estimation of fair value, is $25.23, suggesting that the stock may be modestly undervalued.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value that the stock should ideally be traded at.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. Given GameStop's current price of $19.23 per share, the stock appears to be modestly undervalued, suggesting that the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Before investing in a company, it's crucial to check its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. A great way to understand a company's financial strength is by looking at the cash-to-debt ratio and interest coverage. GameStop's cash-to-debt ratio is 2.01, better than 75.8% of 1095 companies in the Retail - Cyclical industry. The overall financial strength of GameStop is 7 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. GameStop has been profitable 5 times over the past 10 years. Over the past twelve months, the company had a revenue of $5.80 billion and a Loss Per Share of $0.68. Its operating margin is -3.69%, ranking worse than 79.69% of 1093 companies in the Retail - Cyclical industry. Overall, GuruFocus ranks GameStop's profitability at 6 out of 10, indicating fair profitability.
Growth is a crucial factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. GameStop's 3-year average annual revenue growth rate is 1.8%, which ranks worse than 55.61% of 1043 companies in the Retail - Cyclical industry. The 3-year average EBITDA growth rate is 2.1%, ranking worse than 63.29% of 899 companies in the same industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, GameStop's ROIC was -19.13 while its WACC came in at -4.03.
Conclusion
In summary, GameStop shows every sign of being modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 63.29% of 899 companies in the Retail - Cyclical industry. To learn more about GameStop stock, you can check out its 30-Year Financials here.
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