Is GameStop the next Berkshire Hathaway? Here are 3 ways the company could spend its $4 billion cash pile.

By Joseph Adinolfi

The videogame retailer appears to be angling to become an investment-holding company, some analysts say. But there are other ways it could put its money to work.

Following its latest stock sale, GameStop Corp. now has a war chest of about $4 billion - and a retail business that most professional analysts describe as a melting ice cube.

This dichotomy between the company's burgeoning cash hoard and shrinking business is fueling a new guessing game on Wall Street: What is GameStop planning to do with the money? The speculation has only intensified after the company cancelled its annual shareholder meeting on Thursday, citing technical issues with its livestream.

It's easy to see why Wall Street is far more downbeat on the outlook for GameStop (GME) than the legion of meme-stock investors who have put their faith in Chairman and CEO Ryan Cohen and meme-stock pioneer Keith Gill.

According to the GameStop's latest quarterly earnings released earlier this month, the company's sales have continued to shrink. While its losses per share improved somewhat, this was mostly due to cost cutting. Taken together, the company's numbers tell a pretty clear-cut story: Brick-and-mortar retailers are struggling in the e-commerce era, and GameStop is no exception.

Still, some shareholders are clinging to hope. As Gill said last week during his first livestream in more than three years, the bull case for GameStop is built on expectations for a "transformation" of its business.

For its part, GameStop has used securities filings to tout what it describes as successful efforts to transform the company - including exiting its business in Europe, shrinking its overhead and allowing customers to pick up orders placed online at its stores.

But analysts say that changing the trajectory of the GameStop's business will require something more profound. What might that be? MarketWatch asked several analysts who follow the company to weigh in.

Reinvent itself as a Berkshire Hathaway clone

Ryan Cohen has spoken of his admiration for Warren Buffett in the past. Now it appears he may be seeking to follow in the legendary investor's footsteps, as well.

Emulating Buffett's Berkshire Hathaway Inc. (BRK.A) (BRK.B) by turning GameStop into a holding company for other investments appears to be the company's most likely plan of action, according to analysts.

GameStop offered another clue to support this notion in a corporate filing in which it announced the completion of a sale of 75 million shares, which raised more than $2 billion for the company. In the filing, the company said it intends to use the money for "general corporate purposes, which may include acquisitions and investments."

GameStop didn't respond to a request for comment from MarketWatch on Thursday.

GameStop's board has taken steps to empower Cohen to invest the company's money in public, or even private, securities. Although, in March, the board amended its investment policy to require Cohen to seek the approval of two independent board members, who would join the company's CEO and chairman on an investment committee.

Despite this, given Cohen's influence at GameStop and his status as its largest shareholder, he could still likely invest in "literally anything he wants," said Jeff Macke, an investor focused on consumer-facing companies.

Transforming GameStop into a Berkshire-style holding company might sound appealing on the surface, and could be enough to placate the meme-stock crowd in the short term, said Michael Pachter, an analyst at Wedbush who covers GameStop.

But upon closer inspection, such a strategy would run into one major practical roadblock: the company's elevated valuation, Pachter said.

If Cohen starts investing the company's money in publicly traded securities, new investors would likely be turned off by the yawning gap between its market capitalization and the combined value of its assets, investments and business.

Cohen may be able to find a better deal in the private markets, or by buying another business outright. But this would pose problems of its own, since it's difficult to imagine a business that is similar enough to GameStop's to make it suitable for a bolt-on acquisition.

"You don't find a house worth $3 million for $1 million," Pachter said. He recently valued GameStop's business at $1.50 per share in a report where he cut his price target to $11.

There are other risks, as well. Whether public or private, investing in an unrelated business could cause investors to draw unwanted parallels with AMC Entertainment Holdings Inc.'s (AMC) decision to buy a stake in a Nevada gold mine, which Pachter derided as "embarrassingly stupid" at the time. He told MarketWatch that he stands by that assessment today.

To be sure, there are some parallels between GameStop and Berkshire Hathaway, analysts noted. Like GameStop, Berkshire was a struggling textile maker with a business that was shrinking due to insurmountable competition.

While Berkshire's textile business was struggling to compete with producers in the American South, GameStop is struggling to compete in an increasingly digitalized economy dominated by e-commerce giants like Amazon.com Inc. (AMZN)

But that is about where the similarities end.

It is also worth noting that even Buffett has said that his initial investment in Berkshire wouldn't pass muster with his longtime partner Charlie Munger - whose business philosophy called for buying wonderful businesses at a fair price, not fair businesses at a wonderful price. Munger died late last year at the age of 99.

Park it in Treasury bills

Whatever Cohen decides, he can rest easy knowing that time is on his side - at least for now.

Simply parking GameStop's $4 billion cash hoard in short-term Treasury bonds could yield more than $200 million per year - more than enough to paper over the company's $34.5 million operating loss from its 2023 fiscal year.

Six-month Treasury bills BX:TMUBMUSD06M currently yield 5.33%, according to FactSet data.

The company currently carries little debt: As of the end of its first fiscal quarter, its total outstanding long-term debt stood at just $14.5 million. So maintaining a strong balance sheet would also help the company keep its options open in the hope that a better opportunity might come along.

"Because their business has not been shown to consistently generate cash, they could keep [the $4 billion] in reserves, let it earn 5%, give or take, and keep their options open," said Steve Sosnick, chief strategist at Interactive Brokers.

Liquidate and return money to shareholders

It's unlikely, but if Cohen can't work out a suitable turnaround plan, then he can always opt to pack it in, liquidate the business and return capital to shareholders.

Assuming its cash balance remains roughly unchanged, such a payout would come to just over $9 a share, based on the roughly 426.2 million shares outstanding following GameStop's latest secondary offering and the roughly $4 billion in cash it has on its balance sheet. This estimate excludes the value of assets on the company's balance sheet, including real estate, equipment and unsold inventory,

Cohen's stake via his holding company, RC Ventures, is more than 36.8 million shares, or 8.6% of the total outstanding stock, which makes him the company's largest shareholder. Such a payout would net him about $330 million.

That is far less than the more than $1 billion his stake was worth as of Thursday afternoon, based on GameStop's most recent share price. Still, it would still represent a significant profit for Cohen, based on his cost basis of about $65 million, according to calculations made by Pachter.

GameStop shares were back in rally mode on Thursday, despite the cancellation of its shareholder meeting. They were up 12.3% at $28.60 in afternoon trading in New York.

Cohen has steadily purchased more shares in the company since unveiling an initial investment of 5,800,000 shares in August 2020 at a price of $1.35, adjusted for the company's 4-for-1 stock split in July 2022, according to SEC filings and FactSet data.

-Joseph Adinolfi

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06-13-24 1547ET

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