Gamestop (Mastermind meeting Q2 2017)

Hi guys,

I just had an amazing chat with Toby and Jesse Felder about various stock picks. Preston and I recorded it, and it's a lot of fun.

I picked BBBY but that is in another thread.

Preston picked Gamestop (GME).

The financials looks amazing - but I'm more curious about people using their services. What is the moat of the company?

In terms of valuation, I hope to see double-digit return in the time to come, but it's hard to sustain any business without a do you guys think?


Annual reports:

Key ratios:


  • I don't see a moat. It's under attack from streaming. Most people go there to trade their older games. What happens if that goes away? It's reminiscent of Block Buster to some degree. I know they are trying to diversify into other venues. I hope they are successful. The people in the store are knowledgeable. And they could get a boost from new consoles. I would like to see some retailers survive and hope they make it. It does pay a nice dividend, but you would have to question the sustainability as well. Just my two cents. I hope more people chime in here. Thanks.
  • NetNet,

    I do agree that the company doesn't have a strong moat (perhaps none at all).

    This is a cigar-butt - or a value trap if you're more pessimistic.

  • Hi Stig,

    I usually equate a cigar butt as a classic Graham stock trading at a discount to NCAV that looks crappy and may have one good puff left in it. Perhaps the latter is true with GME, in fact it very well may be. It's not trading at a discount to NCAV. I believe it's at 1.10 X BV, but it's certainly cheap on a EV/EBIT basis. Can you think of anyone who would want to acquire GME? Would a private equity firm be interested?

    They have repurchased a lot of shares. However, there has also been a fair amount of insider selling. I don't know if it's all option related, but I would prefer to see some buying, especially if there is a hint of sunshine awaiting in the future. The dividend is alluring. It's like cheese begging for a mouse to take a nibble and get snared in the trap! :-) Perhaps it is a value trap.
  • Netnet,

    I'm really happy that you want to have the discussion. I'm really excited about buying and I'm doing what I can do find people who disagree.

    1) Insider trading for the company:
    If insiders were selling it would seem a lot more like a value trap to me. They are currently buying it seems.

    2) You're right about the cigar-butt in the traditional sense. My own definition (which is likely not as good) is that I group potential stocks in two different piles.
    A) Is it a wonderful business (Berkshire, Apple, Coke etc). Will continue to generate even more money?
    B)) Really cheap (Cigar butt according to Stig though it shouldn't be called that) and while not looking to generate money for eternity then still spin of a lot of cash the next 10 years.

    Clearly, GME would be in category B here.

    3) EV/EBIT of 4.62. That is the cheapest company in the US (disregarding financials institutions and ADR) in the US with a market cap of 1B+.

    Obviously, that doesn't mean that it's a good investment. But it surely got my attention.

    4) I read through the annual report and I liked what I saw.

    I have quite a few concerns. The most important are the digital gaming?

    Why is it not growing? We know that games, in general, are rapidly growing, and we know that digital gaming is soaring, but GameStop is left out.

    Now I don't play computer games so sorry for being ignorant. What happens when you buy a computer game digitally? Do you buy it directly on your console? Why doesn't Gamestop has an app that you can buy it though?

    If even if they do. Do you buy that directly from the software company developing them?

    5) Tech brands.

    What is your take on the tech brands? They teamed up with Apple and AT&T, and the gross margin is soaring (keep in mind though that this division added 192M to SGA). Is that a good business model in your opinion?

  • Stig,

    Sorry, I don't see any recent insider buying on the link you provided or the report that I looked at. I only see direct non open market dispositions and acquisitions recently. I interpret those to be option related. Personally, I would like to see direct open market purchases. The last direct open market purchase was in Sept 2016. Please correct me if I am wrong or you disagree.

    I don't play video games very often. But I do know that you can purchase games online from Microsoft and have them download to your XBox 360 or XBox One. In fact, I believe Microsoft is about to unleash a new product (may already have) that allows you to stream and play a lot of older games for less than $10.00 per month. This could hurt people who may own these games and wish to trade them at Game Stop, as the market will dry up. Game Stop does have an app that keeps track of trade-in-values and has some other features. I think it tells you what game is available at what store as well.

    As I think, I mentioned in my original post, GME may benefit from new consoles being introduced this year. And further Virtual Reality (VR) games, products and accessories may also create a boost to their earning and revenue comps at least in near future and hopefully longer to those who own it.

    Please see this article:

    As for the other businesses, AT & T and Apple related. I don't know really know enough, but my guess is they are lower margin and are there to generate and replace revenue that may be lost from game trading.

    As with all retail oriented businesses you should also check GME's long term lease obligations.

    I do like the EV/EBIT ratio too, but I think retail is not always a fair comparison to a business that creates a patented product, or service. I am also leery of retailers that trade below NCAV. They may have worked better in the past, but the Internet and the advent of being able to stream almost everything has stomped on the retail cigar in most cases.

    I am by no means an expert on GME. I intend to read more and will be interested on what others have to say here. I am always intrigued by cheap stocks. This is a great stock for this forum. I hope some video game addicts will offer their opinions and insights too.
  • Netnet,

    Thanks for the awesome feedback. It really helps me a lot in my process.

    About the link you're right. Jesse Felder, in the podcast episode, talk about the difference between open market purchase (strong bull), and not selling after exercising the option (bull), perhaps of tax reasons. Just looking at the number of trades you're right. I was fixating on the total number of shares as my bull signal, but you bring up a very valid point. Perhaps I simply want this to be a good pick too much and no respecting my own bias.

    One thing that didn't make any sense to me when was it just dropped 5% because a game release was delayed... It didn't make any sense for me at all that a business is 5% less worth for the perpetual earning because a third party delays a video game.... Or I simply don't understand the economics of the business.

    You were right about the Nintendo launch. The new numbers came out this morning...25% increase in hardware sale!

    In any case. Thanks again for the feedback. I'm surely not as bull as I have been.

    I love this forum!

    I don't know if you have any opinion on BBBY: - feel free to let us know. It might be right up your alley with the EV/EBIT being 5.5 - but again - it's retail and I see your point!


  • Hi Stig,

    Yes, you have to be careful when you look at insider buys and sells. However, whether that or any of my opinions on the success or difficulties of GME will translate to it being a good or bad investment going forward nobody can say for certain. That's why it's great to have a discussion like this and weigh the pros and cons.

    You mentioned the delay of a video game. I must have missed that. But yes, I guess if the latest release of Call of Duty, Final Fantasy or Madden are less than stellar I suppose that could have plenty of impact on the traffic at the stores. I would worry about the titles aging and getting stale as well, However, there could always be a new blockbuster on the horizon that none of us has a clue about. My guess is they will also invigorate the older successful titles with VR and more. The console makers also have to stay on the ball. Meanwhile the APP games keep getting better. Originally, they were not viewed as much of a threat to some of the EA, Blizzard franchises. Again, I hope some gamers will join this discussion because I could be way off base. Maybe I have too much of a bias here.

    It'll be interesting to see how GME trades now that the quarter has been reported and the the dividend has been announced. It certainly moved around a lot this week. I would still like to dig deeper into the numbers. Unfortunately, I haven't had much of a chance recently.

    Just a word on biases. We all have biases to why we buy or sell stocks and behave the way we do. I think it's only natural and very hard to eliminate even if you were to read Thinking Fast and Slow umpteen times and memorize it completely. That would be a chore! Even Robo Cop was biased as I recall.

    I don't have an opinion on BBBY. Perhaps, I should take a look. Someone has to survive Amazon or we will have nowhere to go but sip coffee at Starbucks and read annual reports of course. But then again, instead of wasting time shopping, I can take long walks and listen to Podcasts, especially the Investors Podcast. Maybe I'll even order a meal from Blue Apron and surprise my family! :-)

  • @NetNet

    Thanks, for the feedback. For full disclosure, I've bought GME since my latest post, so I guess my money is where my mouth is...haha... I can't wait to follow up on this pick in the time to come.

    I spoke to Jesse Felder and Toby Carlisle about GME before buying it and didn't like it. It's hard to find anyone I trust as much as these guys in value investing and I went ahead anyway. I might just be a stupid investor :)

    I've turned more bearish on BBBY after digging more BTW.

    In any case thanks for the great comments. The forum really needs more people like you! I hope we can chat a lot more in the future.


  • Hi @Stig,

    so I checked a little on GME. Just googled and looked what I found.
    And it seems a little fishy to me. Found many bad comments. Everyone seems to hate the company-the games are expensive, they treat their clients badly (some people tried to sell their old games back to GME and were offered $12. So he sold it over Ebay for $60).
    No real red flag I found..just a gut feeling. And I just don't like it.

    I am also curious to know, what Jesse Felder and Toby Carlisle had to say about it. (Btw - if you remember, I had introduced you to Eric Cinammond a while ago. He just did a Podcast on Jesse Felder's site - the investing world is really small:-) ).

    Also curious, what you found about BBBY.
    Great discussion, like always.

  • @christoph,

    Thanks for the comments!

    Yes - you have to love Jesse's podcast! He told us before the recording how much he liked Eric. I reached out to him and connected, but it fell through (my fault - not his at all).

    For BBBY the insider trading (which I know you don't look at), put me a little off. I really dislike the compensation though. Aside from 3M+ in base salary he still got 10M+ in bonus... For what I ask? And that is still presented as a "cut." A bad management trickles down the organization.

    I might just be too skeptical though.

    Another thing is the momentum. I don't look at that too much (though Jesse does), but he has a point. If could easily dip down below $30 for a short period, and perhaps that is when you get your "puff" and sell it again. Oh man... I sound like a trader and not a value investor :)

    The forum reminds me of the good old days :) - We're old in here Christoph :)

    Thanks for connecting on FB, by the way, my friend!

  • HI @Stig,

    Don't be so hard on yourself. I give you credit for your conviction. I have had ideas that I second guessed myself on because of another person or persons opinion didn't concur with mine. I did nothing and later regretted it. It happens both ways. That's what makes this fun and also sometimes aggravating too! :-)

    Keep watching developments at Sony, Microsoft and Nintendo as well as the game makers. We'll see what happens.

  • Hi @Stig,

    "Another thing is the momentum. I don't look at that too much (though Jesse does), but he has a point. If could easily dip down below $30 for a short period, and perhaps that is when you get your "puff" and sell it again."

    You are right - this is really one of the rare occasions where I disagree with you :-)

    I totally disregard momentum. Falling knives? I LOVE THEM!!!! Really!

    I have caught multiple falling knives already. And the result was always pretty much the same:
    Either the stock advanced pretty much immediately and I made a huge gain.
    Or the stock continued to fall. In this case I double-double checked my assumptions about the stock. And bought more.
    After some time the stock advanced quite much. And I made an even bigger gain.

    Do not try to time the market, Stig. I know myself that I am horribly at that. So I will not even try.

    If you do not want to own a stock for 10 years, do not buy it.
    Well, I do not follow this advice to strictly myself. But in most of the times I sold, because the stock got to expensive.

    And: No, we are not old- we are experienced!

    Always great discussion with you, my friend Stig!!

  • Happy to offer some insight as a life-long video gamer in my late 30s.

    - They are the easiest retail store for people who don't play games (parent and grandparents) to buy games for kids and grandkids.
    - They sell used games at nearly no discount ($3-$5) to retail games, while paying next to nothing when people sell or trade them.
    - They get some exclusives on pre-orders, so they get a bit of extra business from serious gamers. Amazon and Best Buy are both chipping away at this advantage in different ways.
    - Gamers are some of the most irrational consumers. They'll pay in advance for games they could buy on the release date.
    - Gamers often buy new games, race to beat them, and immediately sell the game back at a huge discount. It makes some sense because games are priced like movies, where after a couple months they're 1/2 off to experience. This allows high velocity of buying/reselling. This is one reason why online multi-player, "season passes", and other slow drip content are now mandatory because game companies don't make any money on the reselling used copies.

    - Gamestop is probably the single most hated retail store. People hate working there. Gamers hate shopping there. The shops look like someone sublet some shuttered space and threw up cheap wire racks overnight.
    - They are famous for opening new products, taking out the discs, sometimes even letting employees take the discs overnight, and then trying to sell the opened package as a new product.
    - Their customer service is so bad I don't even use the $10 to $20 gift cards I receive from work or family.

    If you want to invest I suggest buying a full price game from them and immediately selling it back to them. You will be shocked that a company in 2017 can behave the way they do.
  • @draffauf

    Thank you for your unique insights!

    What do you think about the new strategy "non-physical gaming segment" teaming up with Apple and AT&T as well as the new collectibles series?

    Just curious. You are a gamer and hate the store... But do you still go there and why? :)

  • @draffauf

    Glad you jumped into the conversation. I have visited a few of the stores and I would say it's a mixed bag. It depends on the people they hire and how passionate they are about truly helping a customer. I think you're right that less and less younger people are shopping at the store. You are also correct that they normally discount a used game by only $5.00. However, they do have a lot of older games at low prices. If you don't mind playing an older version of Madden or FIFA that's not bad. Best Buy seems to do this as well, but I don't find their selection to be as good. I think both stores have made a mistake by not letting you play some newer games or demos in the stores anymore. Instead, they have resorted to just playing video advertisements for the most part.

    I understand that Twitch, owned by Amazon, is very popular and also where most of the die hard gamers are spending there time. I checked out the Site and it does look cool and it's very interactive. Wave of the future!

    What do you do with the Gift Cards? Give them away? Or use them as bookmarks or coasters?

    I agree that consumers are irrational. Neomania kicks in and they have to have the latest trending game and/or console. I believe, Game Stop still serves that purpose. I have seen lines out the door during the holidays or when a blockbuster game debuts, though not as much as in the past. However, that's why I am not totally down on the stock. It may not be a great long term story, but still may show some respectable results, which the market could potentially be ignoring because they are lumping them in with every other retailer at the moment. Maybe enough "Old School" consumers will give them one more significant puff.
  • @Stig, I love the show and I'm really enjoying the forums.

    I should I say I haven't looked at the business fundamentals, I'm just giving my reaction as a gamer so take it with a grain of salt. I know this is company has popped up on Joel Greenblatt's radar in a recent interview so my bias is definitely working against me.

    New releases are a big deal in gaming, for hardware and software. I think there will always be a place for the easy to access retail store to pick up a present for the kids or new game on Friday night.

    GameStop has been an important distributor for games for decades and they do have some pull with publishers. This allows them to get exclusive bonus content (downloadable characters, maps, etc). I'm not sure how that's translating into their online channels.

    What confuses me is the competition is generally better for the consumer.

    - Walmart: great selection, usually cheaper
    - Target: good selection, usually cheaper
    - Toys R Us: strangely good bundles around holidays
    - Best Buy: used to be good, but have almost no inventory or demo units (as NetNet mentioned)
    - Amazon: you can pre-order, get a discount, special editions, and release date delivery; older titles are 50-75% off. I buy all of my physical games through Amazon months after release at ~75% off.

    I receive a few gift cards over the year. I go in and buy one $50 or $100 official PlayStation prepaid online credit with the cards. Last time I wanted to check the balance on a card I hadn't used in full, they "couldn't do that, the card is too old". What?

    I should also make it clear that it isn't the employees that are bad. They're usually knowledgeable and generally enthusiastic about games. But, they're forced to hard-sell various programs, trade-ins, mailing list sign-ups, the company magazine, warranties, and the list goes on. It's like being asked if you have the "club card" 5 times in a row.

    The increasing ease of direct online distribution from Xbox, Sony, Nintendo, and Steam seem like the biggest likely threats.
  • Christoph, although I was the one that brought this pick up on the show, I'm like you: very hesitant to buy. From a pure finance standpoint, the company is priced almost better than any stock on the market. As I said on the show, you're looking at double-digit annual returns if the free cash flow can be sustained and you can buy it during the 2Q of 2017 at the current price. With that said, I really think the streaming stuff is a very real concern. For me, something just doesn't seem right. I know Stig is excited about this one, but I'm much more hesitant to jump in. Some really great conversation on this one though! -Preston
  • I have not dug into the financials much on this one, but listened to the mastermind discussion on my way into work today and thought it was crazy that someone brought up GME because it is something I have followed. I am a bit of a gamer and my younger brother (16 years old) is pretty heavily into console gaming. I also have a few friends who play games.

    Much like Jesse's son, my brother has not had to go into a GameStop to buy a game in quite some time. My thoughts are that he represents the next generation of gamers and if he is unwilling to go to the store to buy a game I see no reason that anyone else his age would. Personally, I wouldn't go to a store to buy video games either. There's just no reason too.

    As far as the future of gaming, I do think that PC gaming will continue to grow. I do not know the numbers in regards to growth of PC vs. console gaming, but I have a few friends (22 years old) who are much more into PC gaming, which also allows users to download (no CD needed). The biggest competitive games are played on PC, and have global reach. i.e. League of Legends

    I wanted to short GME at 40 a while back, but couldn't get myself to take the short side of things. Personally, it's definitely something I would be wary of.

    Lastly, an interesting idea that my brother brought up to me yesterday, in fact, was that there are games that are being crowdsourced. Not sure what this means for the big name developers, but there I think there could definitely be some disruption coming to the video game industry.

    - Max
  • The problem with PC gaming sales is that the piracy rates are in the 90%s. It might be better these days with online games that require real verifiable licenses to play. But it's a known problem and often affects which platforms indie developers and small studios target.
  • @Stig Are you concerned that GME is issuing debt? D/E is now at 36%. The ratio is a bit higher than it was in 2008.

    I enjoyed your enthusiasm on the Podcast, but I don't recall if you, Jesse, Preston or Tobias brought it up. I am going to listen again. I did like the format of the show on the Mastermind Discussion.

  • NetNet,

    Yes, I'm aware of that. That is what they used for the AT&T strategy. I'm definitely concerned if the coverage ratio goes below 7-8. Good point!

    I just spoke to Preston about the format. We would like to do more of that in the future.

  • I do play video games from time to time. Usually don't download, as they tend to charge full price. And i usually try to find sales (maybe that means i am value oriented :) . But also don't tend to buy from gamestop, they tend to overcharge. Usually end up getting from Amazon, Target, Ebay , or Gamefly. Have bought a few things at gamestop throughout the years though. Last time was an accessory which was basically the same price everywhere i think. I do think digital is a treat, as if you're willing to pay full price, why not get the convenience of not leaving the house.
    Microsoft at one point even had a platform for re-selling used digital games, but gammers hated it for some reason, but who knows could make a come back. Now that digital is a bigger portion of the market.

    Think what i would like to see/understand is how fast the shift is occurring vs when as an investor your expected to get to break even, and how your expecting to get to break even. Is someone going to buy them? Are you going to get the money through dividends? Is the market going to assign them a higher multiple, if so why?
  • I've been a gamer for a long time and I have to say...Stay as far away from GME as you can. The fact that you guys never mentioned STEAM highlights the fact that you're a little too out of touch with the industry to invest in it intelligently(no offence).

    Steam is an exclusively online store selling digital content. They are the behemoth of online game purchases. Not only this, but STEAM is a communication platform that connects all users playing ANY PC game. Meaning there's an organic Facebook sort of growth due to the community alone. They are so massive and provide such an amazing community that publishing companies have given up competing with them. They sell their content directly onto STEAM for users to download and play there. I could go on for DAYS about how bad of an investment GME is, but I'll offer another several points.

    At the moment, STEAM along with several PC part manufactures have started to move into the console space. At the moment the hardware architecture is LIGHT YEARS ahead of software. This means that they are packing a PC gaming experience into a small box the size of your phone. Plug that directly into your TV and you have PC gaming on your couch. Powerful enough to act as a streaming box for movies, games, etc. Historically, I've always viewed console gaming as the "Cheap" alternative to PC gaming. Meaning people played console because "they had to", rather than "they wanted to". That's changing rapidly as there's very little barriers to entry from owning a PC capable of playing any game you'd want. Long term, I think console gaming is dying and you can look at gaming competitions to see this. This will hurt GME significantly as PC gamers will exclusively use STEAM.

    Another aspect of technological advancement that is going to hurt GME is the increasingly fast internet connections AND cheap hard drive space. There's very little holding back someone from downloading a game in several hours, when this amazing feat used to take DAYS(I'm not kidding) only 5-10 years ago. Running over to GME to buy a game with 6 CDs and install the game made sense, because it saved time, but let me tell you - NO ONE enjoyed that. Increasing internet speeds along with decreasing cost and increasing size of hard drives means there's little reason to go into GME.

    Another aspect to GME is their core business. They used to sell games. Exclusively!!! They've slowly moved into peripherals, then accessories, now HALF their store sells toys!!!! We're talking about a company who's losing so much money at their core business that they're trying to reinvent themselves as a toy store that happens to sell video games. That's like TM losing so much money selling cars, that they started selling cupcakes. Talk about value trap. I've never seen one bigger!!!

    Finally, if you read their financial statement they have a huge digital "presence". It's really ironic, but they include digital currency in that digital revenue. We're talking about people walking into GME and buying STEAM giftcards being counted as digital. That's like Walmart selling gift cards to AMZN and calling it a digital presence. Pull up the 2013 Annual report. "The growth of PC digital sales in 2013 was primarily driven by the 160% increase in Steam Wallet sales."

    YOU CAN'T MAKE THIS STUFF UP!!!! After 2013, they stopped mentioning those massive increases and quietly added it to "Digital sales" and "digital presence". There's nothing digital about gift cards.

    Anyways, good luck guys, but stay away from this stock. It's an absolute DOG!
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