GameStop Has a Pile of Cash. Its Bitcoin Play Is a Hit, for Now. — Barrons.com

By Janet H. ChoGameStop shares are on a tear Wednesday after the videogame retailer and meme stock announced plans to invest in Bitcoin.Wedbush analysts led by managing director Michael Pachter raised their price target on the stock, noting they were impressed with a rare operating profit for the holiday quarter despite a significant drop in revenue.Pachter pointed to GameStop's $4.8 billion in cash, which is up from $921.7 million a year earlier and which it has yet to deploy."It is clear that the company's operations have some value, albeit not as great as its share price suggests," Pachter wrote Wednesday, raising the target price to $11.50 from $10. The new target price reflects the company's cash balance of approximately $10.50 a share plus $1 in going concern value, he wrote. Wedbush rates the shares Underperform.GameStop stock rose 15% in midday trading, to around $29.25. Pachter's new price target implies the possibility of a 60% drop.The company said after Tuesday's market close that as part of revisions to its investment policy, its board approved "the addition of Bitcoin as a treasury reserve asset, whereby a portion of our cash or future debt and equity issuances may be invested in Bitcoin."GameStop added that it hasn't set a maximum amount of Bitcoin it can accumulate and it may sell any of the digital currency it may buy.The company previously said that Chairman and CEO Ryan Cohen, two independent board members, and others would manage its portfolio of securities investments."Bitcoin investment adds a whole new layer of meme love," Pachter told Barron's in an email. "They continue to see their core business decline, although they have had some modest success with trading cards, but investors are hopeful that investment in Bitcoin will drive the stock significantly higher."But, he added that it was difficult to understand why an investor would pay 2.7 times GameStop's cash value for its stock only to get the chance to convert that cash to Bitcoin, "particularly since the same investors can invest in a Bitcoin ETF themselves."At current levels, the shares were on pace for their highest close since Jan. 13, when the stock closed at $31.02, according to Dow Jones Market Data.Wedbush noted that GameStop "has managed to trim its operating losses to almost breakeven, with a net operating loss of less than $10 million in each of the last two fiscal years."Management's resolve to run the retailer efficiently makes the analysts "more confident than we have been in the past that GameStop can achieve breakeven results for the foreseeable future," Pachter wrote.They noted that its plans to invest in Bitcoin could affect its interest income, but for now, "we are going to assume that GameStop can continue to generate $220 million in interest income for the foreseeable future."Wedbush had previously expressed skepticism about GameStop's entry into the collectible trading card business last fall, but they noted Wednesday that the collectibles and trading card business grew 15% in the quarter, despite an overall sales decline of 28% from the same time a year ago.Because a substantial portion of that business is conducted online, they said they "expect to see the collectibles business stabilize or even grow going forward, even as GameStop continues to shrink its retail footprint," noting that the company closed around 1,000 stores in 2024 and announced its withdrawal from Canada and France.GameStop reported mixed results for its fourth-quarter earnings ended Feb. 1.For its fourth quarter ended Feb. 1, GameStop reported net sales of $1.28 billion, down 28% from a year earlier and below the $1.48 billion analysts surveyed by FactSet had expected. But its adjusted earnings of 29 cents a share beat the 8 cents a share analysts expected. Net income of $131.3 million was also above the $33 million expected.As of Feb. 1, it operated 3,203 stores in the U.S., Canada, Australia, New Zealand, and France.Write to Janet H. Cho at [email protected] content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.