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yo what up everybody this is going to be the first video of the kitty corner and the market has kind of forced my
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hand on this one the first stock that i'm going to talk about is gamestop and i know it's a polarizing stock some people won't even tune into the stream
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right now when they hear that i'm bullish on gamestop uh at the current price point it's trading about four bucks right now 260
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million dollar market cap and i most of these kitty corner videos i want them to be shorter like one
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minute five minute ten minute max i wanna be that's that way it's just a quick intro into uh my thoughts on the stock
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but this game stomp on it's going to be a little bit longer because um i have a lot to say about it
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i could talk about it for weeks i'm going to try to keep this as short as i possibly can but i have a lot to say i'm also hoping maybe you can catch some
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of my blind spots if i have some poke some holes in my thesis and share it with me because um yeah i think
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everyone else is crazy and i think i'm right but i've been wrong plenty of times in the past so i'm gonna upload this and maybe you can
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share your thoughts with me but uh yeah let's dive in gamestop okay here we are so like i said this video is going to be a little bit
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on the longer side for a kitty corner video so if you drink you might want one of these for this
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it's july 2020 right now and i'm bullish on gamestop at the current price point of about four dollars per share
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260 million dollar market cap i've been adding to the position the past couple weeks it's been trading below four
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dollars per share and it's now the largest position in the roaring kitty model portfolio so
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um yeah i have a lot to say about it i've been i've been tracking it for a while i know it's a divisive stock so
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definitely share your your thoughts with me on this whether you agree with me or not i'm curious to hear um and because i have so much to say
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about this i had to put together this word doc just to help guide the conversation because i'd be all over the place because i uh
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without this guidance so i tried to just focus on what i consider the more important aspects um it just boiled into a single word doc
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here but uh yeah we'll just we'll just see how this goes but before we kick things off some recommended reading in fact i can save
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you the trouble of watching this video because my bowl thesis has already been covered by so many other folks i'm kind
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of just just sharing with you my viewpoint but everything that every aspect of my thesis people have already talked about so
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if you read these things these recommended things you won't need to watch this video so if you check out scion's letters to the
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board in just their commentary on things uh cyan that's barry's firm they had to file a 13d this year
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because they took a position at the time greater than five percent and within that 13d i haven't pulled up they had they included all their letters
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all their communications with management and the board and so forth so if you pull up that 13d at the sec website you
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can look through all the letters all in one place you could get these elsewhere too because they were press releases but i kind of like having it all in one
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place um so check out those letters to the board and also because there was the the board
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vote back in june they uh they shared their opinion on uh
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gamestop back in june so this is their latest viewpoint at the time they still even though they weren't they were below five percent they still had four percent
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position which a good a good size position but they shared their latest views so this was as of june this was only a month ago so
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scion st still seems fairly bullish on this but i really like i really like barry's letters because they they get right to the point so
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quickly that uh the whole thesis is right here this latest not maybe not just this letter but the
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whole thesis can be found in just these letters he has a he's a great job of of communicating his points so succinctly
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um but anyway i bring this up because that's his latest commentary on the company and besides scion you'll also want to
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check out when i say headstone premise letters and their restore gamestop presentation so hester and permit i think they own like seven eight percent
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of gamestop right now the activist investors they were the ones trying to get board seats but uh they've had a number of letters
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back and forth um over the past couple years now but they check out those letters too
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they have a lot of thoughts and good thoughts on gamestop um and they also have this restore gamestop
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presentation this is from may 2020 where they they put together this presentation to try to help them to
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share it with the investors and so forth help them get the board seats but it's like 80 plus pages like how much can i add to an 80 plus page
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presentation not much i'm going to reference this a couple times in this video but check out this presentation because a lot of the thesis
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is covered right here and then yeah so let me just pull this
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back over here all right so that's some recommendation also the seeking alpha articles i think i have it open here seeking alpha
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articles yeah there's all sometimes you come across a company there's not that many articles written or the ones that are written just aren't
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that good gamestep has a number of really good articles out there and um i'm biased you don't need to tell
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me this but in my opinion the the bullish articles uh here the bullish authors they seem to
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be more attuned to reality than the bears i think maybe you disagree that's cool let me know but i think they seem to be
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more the security analyst type this is going to come up later in this video but um check out the articles a lot of the stuff i'm going to say it's already been
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covered here so that's what i mean i don't have much new to say i'm just sharing my viewpoint so check those out but yeah i think
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that's just about everything some recommended reading so you read all that stuff you probably don't need to watch this but if you are going to watch this
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let's keep moving forward so like i said there's a lot of aspects of a lot of moving parts to this bowl thesis but i boiled it down to just what
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i consider the three overs digital risks seem to me to be overblown the negative sentiment is overdone
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and the value is overlooked in fact i think the gamestop stock is i mean it
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epitomizes value investing it's like value investing at its finest because it's such a classic case of
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a value investing we'll get into it later i don't want to spend too much time on that but it's just a classic value stock
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and i think that's why it's so polarizing in my opinion but okay so let's get into the digital
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wrist overblown so um the tren this transition to digital i think it's just much slower than what's
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being priced in it seems to me that um it's been happening over time i do think
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it's inevitable like if we're looking out 50 years 100 years we don't need to have a discussion because i'm on we're on the same page everything's
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going to be digital i just don't think we're there yet and this is meaningful because 2020 is when the consoles are coming out we it
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does matter where we are today and where we'll be the next couple years you can't just say we're going fully
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digital so that's the end of the discussion i think that's what a lot of people are doing i'll touch on this later too but people just go digital is the future so there's
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nothing to be had here with gamestop there's no he there's there's no future um but
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i don't think we're there yet i mean it's just it's transitioning much slower i have some web pages pulled up here
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just to so i think i try to let me just keep on going with these bullet points i'll just list them before i start pulling up some
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other websites but people just say i mean physical discs there's they still remain a good size chunk in 2020 that's part of what i'm getting at
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i also think in-game purchases they're kind of skewing some of the figures that people are sharing like they'll share some figures which i'll show in just a
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sec if they're saying this is what percentage of the market is digital right now but i think those in-game purchases are kind of affecting that i'm
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not certain but that's okay because i'm a value investor i don't need to be precise um and then why disks but before i get
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to ydisk let me just share some of the things so if you google like physical versus digital you're going to come across the
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statista web page and like you see stuff like this and maybe other people are and
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and you see i highlighted this part in contrast only 17 of video games were sold in physical form
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and you see figures like this and you see the trend too if you look at the trend over the past five years it looks really alarming and i did this so people
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see this and they think oh man game stops toast but um i think there's just some
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misunderstanding with that data i think a lot of that like i said is is in-game purchases i think the
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actual outright purchase of disks is still relatively high
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and i have um let me just see what other page i got up here so to counter this there was an article
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in may 2019 by uh web bush securities i mean maybe they're biased too maybe they're bullish on game stuff
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but they talk about a number of things that like kind of counter that point that everything's going digital like sales of uh the fifa game is still 75
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discs in 2018. i don't even know the accuracy that i see the report that they're citing but this is the thing you're going to see
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lots of data and as an individual investor it's hard to know what's true and what's not what's accurate so you kind of just got to read a lot
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and try to get a feel for this type of stuff and so check out this article it was in variety check this out because they kind
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of counter a lot of this stuff whether or not you fully agree with it that's another thing but just read it and then there was another thing here
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too in game industry.biz where they talk about this is more a european focus where they're talking
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about certain countries um what percent is is digitized what what percentage of
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games purchased or physical and so look over this i don't want to review the whole thing that's not the point of this video but just check out these sources
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where this was 2018 2019 it's 2020 right now and the trend is clearly going toward digital but this is my
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point is that you're still seeing some countries that are still heavily skewed to physical and i don't think one year later all of
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a sudden everyone's going to be buying digital so that's the thing is because these next few years are critical for this gamestop thesis and so
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if there's still a good chunk that's physical games gamestop sells other stuff too but i the software itself those used games
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what everyone's focused on because that generates a lot of free cash flow that in particular yeah i just checked
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these articles out now i know i'm rambling a bit but i got to keep going to keep this quick what else did i have up here oh and then
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like so there was a um uh this article's from june 2019 it was an interview
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it was it was on the verge but they were talking to uh the xbox boss phil spencer
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and um so this i'm like trying to piece together the story as to that's what i mean it's so hard to know exactly what
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these numbers are how many people are still buying discs so i like try to look for stuff that piece to piece together the narrative
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um and so phil spencer was saying i want to get this was last year i want to give
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people choice and right now physical is a choice that millions of people love so this is the xbox
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phil spencer and they're saying this last year that's be that should be meaningful to people when you tell me no one's buying
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physical anymore if xbox um is saying that so the people in charge of xbox are helping lead the
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charge of saying that's like you should pay attention to that um and if you remember back in 2013 when
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they were rolling out the xbox there was some confusion over the console and they kind of messed up a bit
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and then they had they wrote this blog um i forget the the story itself but you they had to say
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like this they had to walk it back you told us how much you loved the flexibility and so forth and uh with games delivered on disc they had
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to start offering um the dis version and start trumpeting that even more because people wanted that i get it was 2013.
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it's changed during this console cycle i get that it's not lost to me i just mean um that xbox kind of realized that like
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all right people still want these discs and i still think that's the case today 2020 to a degree maybe not not as much in 2013 because it
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has indeed changed quite a bit but it is still it is still relevant um
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and was there anything else i wanted to point out i had a couple of web pages that i pulled up i showed that nah that's it that's it for this oh and then
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just the general physical versus digital case now because it's it's july 2020 the consoles are coming out you're gonna see a lot of
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youtube videos of people debating this should they go physical should they go digital and there's a lot of good videos out
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here and uh in particular uh fanta i haven't seen all your stuff yet but from what i've seen so far you have a lot of
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good thoughts on this i mean i know you're not a security analyst that's what i mean a lot of people are voicing their opinions you have a lot of
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um spheres crossing paths here like gamers and so forth and i agree with a lot of stuff the finn is
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saying here but he brings up a lot of good points um but then in in also these other ones
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he's got a couple videos too um but um there's a whole number of videos out here and everyone seems to be
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leaning a bit more toward physical when you watch these things um i just find that interesting like why
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you hear digital digital but then you see these videos and people kind of talking more about the benefits of physical but you can find it both ways
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you can kind of find whatever you want to find in here but in this video i brought this one up because this gentleman he's leaning more
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toward digital and but then you check out the comments everyone starts talking about the disc
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versus disc version i want the disc version dispersion diff just about every comment not maybe not every single one but like this like this
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i'm trying to piece together that story right um so when i see stuff like this i just find it interesting that all i'm trying
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to figure out as a value investor is is there any is does there remain some demand in 2020 for those disks
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because that's important for game stops um the free cash flow degenerate free cash flow generation so
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look check this stuff out for yourself i'm just not we're not going to watch these videos right now but i just encourage you to check it out yourself if you're trying to build your own
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thesis around gamestop and then um so why discs uh
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preference console storage trade value download speed sharing i don't even need to i'm just it's covered by the restore gamestop
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presentation um this the what we're getting at here is that there's still consumer demand
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for game stops offering so let me pull this over here and let's just scroll down just a couple
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this is what is this slide 80 i think um and just gamestop retains my share with customers now this is all quoted
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from one single survey so this is the stuff i look at where are you getting this data from um is this demand legitimate and this is
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what i mean i'm not basing everything on this one single data point but um this is the stuff i like to see as a as
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a value investor because i just need to make sure that gamestop isn't going bankrupt in that people are
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still buying disks and that there are still demands for gamestop for just a couple of years because if that's the case
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gamestop is likely undervalued so the point of just showing this that gamestop there's still interest for uh it is some
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or many of its products and then digital downloads have slowed share gains over time you can see this
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this chart too check just check out this presentation right but i'm just i'm just trying to make my point there that uh it's not over yet in 2020 it's not over
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yet 2030 yeah maybe it will be but not yet um anything else oh yeah so this is a
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list of the i've kind of put together that list it's uh you can see this here too so it's interesting that people are
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downloading games isn't lost on me right because i i have friends i have family and they think i'm crazy that i'm
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bullish on gamestop because they many of them are downloading or downloading games and so that's the thing you got these anecdotes you're
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talking to people and so forth and maybe you you're i feel like most people watching this are probably downloading games
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um i think gamestop might serve a different target customer where um not everyone has an amazon prime account
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i have that up uh what is it like um yeah 112 million
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members amazon prime as of december 2019. that's not every like everyone just
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thinks oh you just buy it on amazon that's it and uh but like not everyone has an amazon prime account some people
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do want to shop at brick and mortar maybe they want this i'm going to just list and stuff that's already here they want the trade and value they want these
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things and that's not to say that you have these things or you want these things and so forth or that these are an issue
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for you perhaps they're not i'm willing to bet that they're not because if you're in a situation where you're watching this video um
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then i've yeah it just depends i don't have time to get into all that right now but
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um yeah so that's the way why i think digital risks are overblown i still think physical um is here for at least a few
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more years in particular this console cycle i still think it's going to be relevant and i think that physical disk version
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is is going to outsell the digital version let me know what you think for the for the new xbox and playstation consoles uh all right so
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the next one is let me move this back out of the way negative sentiment is overdone so this
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is some of the heaviest negative sentiment i've i've seen with the stock i um
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just about i mean it there's just so many different ways people are negative about gamestop
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about its stock about its future business and so i just jotted down a couple just for fun uh these are these aren't all true exact
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quotes people have said to me but haven't shopped there in years or my friends haven't shopped there in years you can download everything digital's
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the future gamestop's the next blockbuster that's a popular one people just they say oh gamestop's a
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possible investment they go oh no no that's the next blockbuster and then they just move on they go that's the end of the discussion
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that no one wants to look under the hood the terminal value is zero um with the
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poor managerial decisions they like blame past managerial decisions as a reason not to invest in gamestop brick and
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mortar is dead anything brick and mortar is a bad investment so amazon that's the end of the discussion did you just say amazon
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anyone if amazon can compete with you then you're dead and then and then the pandemic so there's some
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there's some legitimacy to some of these things i'm not saying i'm not saying that these things are all ridiculous i'm not saying that
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i'm saying that that it's just so much of it that i think that's a a part of the reason that it's weighing
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on gamestop gamestop stock price so much in july 2020 because it's really heavy it's
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really heavy to get out from underneath that it's a reason part of the reason you see such heavy short interest as well
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but i think this is so this has led to an opportunity that that's that's what i think but um yeah so just so much negative
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commentary i just think that this sentiment is so negative that it's overdone that's what i'm trying to get at in this section and also with these game stop bears i
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you've read some of these articles or some other some of the commentary on this and i think people because they
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themselves this one i was trying to get out too they seem to falsely impute behaviors to others like they themselves not but might not be customers of gamestop
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or if they have bought physical disks they have the ability to to resell it on ebay or something like that or
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they just download everything and i think what happens is the people who are opining on gamestop as an investment
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they're they're the loudest right but they don't they're not they're just not customers or they are their friends or family on customers too
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and when they have that reason when that happens they they um i don't know maybe they're not digging deep enough or maybe i'm wrong i mean i might
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be wrong about this too but i think people are thinking that everyone else behaves the way that they behave
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and i think that could be a mistake in this case because from what it seems to me that there are
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still people shopping though there remains demand and just because of people talking about it don't have it doesn't mean it's not there i think i think this
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is my thesis you're welcome to to tear to shreds feel free i encourage you to please
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comment on this video or talk to me on the live stream about it because as you can tell i'm really curious about this and also many of the people who are who
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are negative on gamestop they don't seem to be security analysts and you may some of you may think that may not matter but it does
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like this is the opportunity for like a value investor is that yes i'm analyzing a business model right
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i mean that's important for some people that's all that matters but when you're analyzing a security like you can have i don't think
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gamestop's terminal value is necessarily zero but even if it were that doesn't mean game stops a bad
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investment right now and i think that's lost on some folks because they're not bona fide security analysts and so if
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let's say you've been right about the industry the past five years or so maybe you're just a gamer um or um
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an investor who's just reading some of the headlines and you see the trend towards digital and you and you can you're kind of like all right this is probably
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inevitable but you don't start looking at the hood you're not looking at the balance sheet you're not looking at historical uh free casual margins or what to expect
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in the future or something like that and i think if you're not a security analyst and in digging into the stuff it gets lost
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in you that doesn't mean the security analysts are always right we make mistakes and we might be wrong on this one but when i see that when i see a bearish say
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seeking elf article out there um and i read through it and i think no this isn't this doesn't this isn't like
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security analysis to me you you know you know you're not telling me the things that i want to hear if i if i were trying to build
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a bearish position on the stock then i think all right then that's something to be wary of my my i perk up a bit
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so yeah that's it that's just this negative sentiment just seems so heavy and i think that's why we're where we are today at uh i mean sub four
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dollars in july 2020 that's that's surprising me maybe earlier this year and last year
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and stuff but so close to the console refresh that's something that's something okay so then finally value is being
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overlooked i think oh i wouldn't like to keep this on the same page i need a drink i'm just going to stop you know
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all right so so because of these like first two things i feel like um no one's looking under the hood i already said
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that but there's a lot of things that are happening fundamentally that um that that one could be excited about myself
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included so like there's a new board of directors um there's a new management team and so that's what i mean people criticize
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gamestops historical decisions their poor acquisitions and so forth um and maybe um your poor operational
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decisions whatever it is but it's all right cool cool yeah that's that's fair but we have a new manager team right now that's not to say they're
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going to hit it out of the park that's not the point the point is just that it has changed and so far i have to say they seem
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somewhat comp somewhat competent um i mean they just got reggie to the board too i feel like that's big
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but then you got sherman for the management team he's only been here just over a year he's just getting started he needs a little bit of time
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i know barry he voiced his opinion on the new board seats and he he uh he wasn't in favor of hester perman i kind of get that i i don't it's
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a marginal impact on the bull thesis it's okay that has to impermit they seem like they they they know they
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get their finger on the pulse i don't think it makes that big of a difference but i kind of get where burry's coming from because it kind of feels like
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management's been doing some good things over the past 12 months in the right direction and we'll get to
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some of this stuff as i work through this bullet point list but i just mean so far from my pers from it just looks like
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they're they're competent they're doing the right things and as a value investor you need to see that because if they don't you kind of need stuff to go
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you need a lot of a lot of stuff to go right i don't want to say that but it's just an important element of of
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this type of a thesis and one of the ways they've been showing that they they know what they're doing or
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they're seeming competent competences they've been cutting costs so they talk about cutting costs there's one thing to talk about into one thing to actually do it they seem like they're doing it that
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so um they're cutting costs um in fact while i go part of what i want to do
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here during this video is i want to review some of the fundamentals and we'll get to this but i just want to
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review a couple more things as i do this ah sorry about that
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um they've kind of reducing cost of goods sold so it's identifying the stores testing it
21:42
and we're improving working capital management um a lot of people talk about this but they seem like they're actually doing it
21:48
um they can make better capital allocation decisions you can see them selling assets actively testing stores uh they're not
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making any dumb acquisitions like you like this this is just stuff that's it demonstrates to me that
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they're on they could be on the right path that um they could be um like when you're selling assets like
22:05
in this year when it's a it's a tough year for gamestop and they're selling the jet
22:10
selling doing some sale lease back um some sale lease back things just to generate a little bit extra cash that
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cash goes a long way right now and um and of course testing the store that feeds into longer term things right
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but this stuff's important and then improve flexibility they have right now because of the refinancing they extended the maturities and they
22:27
got rid of some covenants like i'm listing a whole bunch of things here that but like how not enough people were talking about
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this stuff this is what i mean like the stock price it seems it's gone nowhere for 12 months but the fundamental events that have been
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unfolding are like objectively positive i um it things are they've been
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incrementally improving and that that the price is still flat is surprising to me um
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they have adequate liquidity now to get through the console refresh and for a potential turnaround it might be still too early to that when i say potential
22:57
turnaround i mean like re revamping their business model to be like they could be here in 20 years right now i'm not sure about 20 years
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right not many people are but they might have enough liquidity especially to get to the console refresh and can generate some extra cash they
23:08
might be in a good position tough call but definitely enough liquidity that i don't people talk about gamestop going bankrupt and stuff i
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uh if you're saying gamestop going back over you need to you need to you need to show your work on that one
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because i don't see it at all it highly highly highly highly unlikely to happen
23:27
um i it's hard for me to take those types of these that type of a thesis seriously so um
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i'd be i'd be wary of that um anyway gamestop still remains highly
23:39
relevant too they got six billion in revenues at the tail end of a console cycle they have one billion during the
23:44
the um latest quarter q1 look at this this was they had to uh
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um that would be dealing with the pandemic end of a console cycle they literally had to close their doors and
23:56
they still generate a billion dollars in sales like a billion dollars and then i talked to my family and
24:02
friends they go yeah no one shops there anymore i'm like how do you do a billion dollars how do you do a billion dollars and anyway i know free cash flow is what
24:07
matters but still that's telegraphing to me like people are still shopping here and yes everyone see everyone will focus on the year over year declines right
24:13
yeah let me drink um it's just that sheer level that
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sticks out to me first um yeah so um let me get back to this
24:26
so i like to see it six billion in revenues is legit that's that's a good size that's a good sometimes you come across a company it
24:31
might only be um like a billion dollars two billion reverse to two billion revenues especially like a retail company and i think all right well as
24:37
um it's gonna fall off a cliff tomorrow and you might say game stops revenues are currently falling off a cliff but if you're still
24:43
at a billion dollars right now with a new console cycle on the way that that
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that's um that's legitimate and um yeah six billion is a good size is good size
24:54
um okay so significant operating leverage because of this it's trading at just four
25:00
percent of these revenues i you don't see too many companies traded four percent of of revenues with this
25:06
type of a financial situation like usually you see that and often when you see that companies
25:11
might be going bankrupt in the near-term future and like i said i think that's highly unlikely with gamestop so four percent of revenues with a new
25:18
console cycle i think what the hell what so anyway if the things just go a
25:23
little bit right then that that operating leverage can lead to a a huge rise in the share price due to a
25:30
realization of what fair value is all right so then just the company's been historically successful at
25:36
generating free cash flow this is the the next um item that i had on that list if we just pull up simple free cash flow
25:42
here in fact let me scroll over to just these are this side over here ignore the conditional formatting i didn't clean it
25:47
up but uh if we look at simple free cash flow this column this row here that's operating cash flow less cap x
25:54
look at they were generating half a billion dollars there for a couple years and uh it's just been historically
25:59
positive this is rolling 12 months so this is through q1 2020. if you look at
26:04
fiscal year um 19 got a little bit wonky because they were aggressively paying down some accounts payables and
26:11
uh they're trying to work on working capital they're definitely close to burning cash
26:16
right now i we don't need to get into the the specifics but anyway but if you go you go to the rolling 12 months and you
26:22
start seeing they've been positive generating positive free capsule this whole time um really impressive you don't see that
26:28
too often and it doesn't mean it's what's going to happen in the future i just mean it just sticks out to me and then generating 500 million and that
26:34
type of i call it simple free cash flow that's um that stands out to me so yeah and despite i think that i know
26:40
hester and permanent comment on this too but i think they've had bloated costs in the past i think sg a selling general and administrative
26:45
expenses seem to be pretty high and uh they probably could have been doing a better job of managing that working comp working capital i think
26:51
that previous manager team was just a little bit lazy on that front they were kind of just riding
26:56
riding the wave of the business model and they weren't really trying to do a diligent job of managing the operations
27:02
and so they were still generating a ton of free cash flow that is pretty pretty impressive so um oh yeah but it seems to be overlooked
27:09
a little bit okay so then and then right now 260 million market cap give or take
27:15
and i think let's it this is trading at what i perceive to be a discount to the fair net asset value to fair book value
27:21
of around 400 million give or take plus a conservative estimate of future free cash flow so this is where i spend a little bit of time
27:26
on in this video i don't know where i'm at right now and time-wise but let's just dig into this just a little
27:32
bit um just take a peek at the balance sheet and when you look at the balance sheet
27:37
like doesn't it stick out to that cash position of 570 million to a market cap of 260 million like holy
27:44
[ __ ] right i mean you don't see that that often um usually when you see that it's it paints a really dire picture for the company
27:50
and maybe that's why this price is is in the gutter but it doesn't deserve to be in my opinion and i think people might
27:56
be thrown off by some of these things and accounts receivables let's
28:02
say the thing so if companies not going bankrupt we can assess these things with gamestop being a going concern and if that's the case you don't need to
28:07
discount them too heavily so i'm right i'm pulling up this balance sheet just to assess the quality of book value so right now we have book value of
28:12
about 435 million and the question is is that a legitimate is that a fair estimate of what book
28:17
value is if the company were to like sell all these assets and distribute it to shareholders it's not a true liquidation i'm not i
28:23
want to do a liquidation analysis because i don't think the company's going bankrupt they just want to just a quick assessment of what what
28:29
their assets are currently worth that's what i'm going through like cash you know that's pretty legitimate value they're 570 million
28:34
receivables also pretty decent um you can you can kind of bet on that to a degree maybe 50 million 60 million merchandise
28:42
inventories you see the big decline in inventories they've been trying to been working on
28:47
improving their working capital management and i'd like to think i have i don't like to think i it would be nice if the inventory that
28:53
they're selling off has been the lower margin or um um inventory in
28:58
less demand and so forth so it's only higher quality inventory that's left over and actually if you look at the 10k this
29:04
is q1 but if you look at the 10k and you start going through the footnotes and analyzing the inventory it kind of looks like that a good chunk of
29:11
the inventory the majority of their inventory is higher quality inventory and by that i mean newer hardware newer software and if
29:18
that's the case um that might this inventory dollar amount might be
29:23
pretty pretty accurate and some people look at gamestop inventory and they go think oh oh that's used games that's
29:29
probably not what's worth what it's on the books as but this stuff's carried at costs even those used games the older used games that
29:35
they have if many of you may know they're paying a small fraction of what they ultimately sell it
29:41
for i know people complain about that but it's carried in the books at that cost that what they paid for it so even if it
29:46
might not be selling at the sale price they hope in theory you'd think that they could potentially get in the ballpark of cost
29:52
maybe not but that's what i mean and if the inventory is is indeed higher quality newer and so forth and that inventory
29:58
figure is probably in the ballpark of reality and prepaid expenses is a going concern that's probably a fair value of that
30:05
maybe a slight discount assets held for sale i think that's the jet but they sold it like the week later so that's done
30:10
um and i mentioned the the warehouses in the distribution facilities that they're they're hoping to do a sale lease back
30:17
on um that it's not it's not under assets held for sale it's it's elsewhere
30:22
probably under property and equipment but um that's another thing that's held for sale right now that will uh generate some cash just something
30:28
that that's the thing i didn't toss it on the bullet point but there's another there's another cash generating thing that they're doing um
30:34
that's gonna this balance sheet's gonna be modified it already is modified right it's almost um we're in july here q2 is
30:40
almost over but um yeah um forget the leases i don't want to get into leases right now it's
30:46
uh i disagree with how they're handled on the balance sheet it kind of interferes with my analysis
30:53
and there's a contra account in the liability checks and we don't need to get into this now but um
30:58
deferred income taxes that has value um as a going concern and so forth and then
31:04
other non-current assets and i don't know where it's in here but they also have the game and former magazine which uh
31:09
i mean i don't know how much that's worth everyone likes i get i know game and former magazine you automatically get it when you're a subscriber to
31:15
gaming uh uh to the um to the remember the gamestop membership account oh by the way they have 42 i should have mentioned
31:21
they said 42 million members i think that's what hester perman's uh presentation said so people say people
31:27
don't shop there it's like there another reason they're incentivized to shop there they have that membership which gives them some some perks and stuff but
31:32
42 million anyway um they um along with that membership they get the
31:38
subscription to game informer and maybe not everyone reads it but something like i think i have the do i have it up
31:45
yeah here it is okay so the game form magazine they have yeah look at this so this is the top
31:51
um subscriptions in the united states in game informer um number five on the list with six
31:58
million in subs so um yeah like i said i know not everyone necessarily reads it because you get it with the membership and so forth but
32:04
that's a lot of eyeballs on there i mean you don't have a fraction of reading them and then you see something like time number 13
32:10
i think that sold for a couple years ago for just under 200 million i think i had looked that up recently
32:17
and um in time i mean people are subscribing to that and i'm sure it's generating
32:22
probably more free casual than game informer again if if people uh i don't know what the breakdown is for how many people are paying for that
32:28
subscription and stuff nor how many are reading it and so forth but if times getting close to 200 million
32:34
and uh i mean what matters is if game informer is making money right i get that part but it seems like an asset for one of the uh a thriving
32:41
industry like gaming and you got one of the top magazines it's a question of how much it's generating but nevertheless we can
32:47
it that the the name brand itself probably has some value so it's just another asset that could in theory
32:52
potentially be monetized i just i don't know what the value is i don't need to this is the good thing about being a value investor
32:58
it's like my default like ah okay it's on the books just because you come across so many companies where they
33:03
don't have these assets they don't have leverage to pull that's what i'm trying to convey here with gamestop they have leverage to pull
33:09
and this is just another example of it so i'm not sure where it is on the balance sheet uh maybe this other
33:15
maybe property and equipment i'm not sure but it's on there that's on there and then you get to the liabilities and all the liabilities are pretty fair
33:21
crude accounts payable accrued liability so actually some of these are probably like
33:26
this one game like gift cards and stuff like this i mean like that's kind of a it's a legitimate liability but kind of
33:31
a soft liability um and then the operating leases we can forget about those the current portion
33:37
long-term debt this has already changed because of that bond exchange they did um yeah they were able to extend the maturity a couple of years and they got
33:43
rid of some covenants because of it over 50 percent agreed to do it and that's just that's huge news and uh and
33:51
because it gets them to the console cycle and it gets them to the point where they'll they could potentially have much more
33:56
free cash flow to navigate their their uh their situation but anyway so they just it's changed and uh the line of credit
34:04
also they have some unpaid rent too we mustn't forget that it's in here somewhere somewhere probably accrued liabilities and stuff but um
34:11
but they have the the revolver too which is almost certainly changed now that it's july but um although um
34:18
some other long-term okay moved into new other long-term liabilities and then total anyway so as we work through this and we
34:24
look through all this then you see book value of about also i like to see sorry retained earnings of that 1.3 billion
34:30
they've since had write-downs right because all those acquisitions they had they wrote them all down probably some inventory and stuff
34:35
but i'd like to see good retained earnings because it proves the company was at some point historically at some point profitable so that's what
34:41
i mean legitimate business model historically anyway now you see stockholders equity after major write-downs and stuff
34:48
um that's the thing if you hadn't seen major write-downs then you might think that there might be some on the horizon right around the corner and stuff but we
34:53
already have them at least especially the soft stuff like goodwill you should just assume goodwill's just a future right down when
34:59
you see especially if a company is battling risks and stuff but now at 435 million
35:04
um i know it's not a liquidation analysis and stuff but uh that's it seems to me in the ballpark it's to
35:09
get that fat cast position too so yeah it just seems to be in the ballpark so it's meaningful because
35:15
the market caps at 260 right now so not a bad margin of safety but in addition to that there's also the
35:20
opportunity for future free cash flows right so if i pull up this um this is my one of
35:25
the fundamental spreadsheets that i have and this is where i perform the analysis i know i just had this open but
35:32
um let's just poke let's just look at a couple things in particular that stick out to me i mentioned the revenues we're at six billion people focus on this
35:38
year-over-year decline right it's alarming that's a fair point it is alarming but people are overly focused on that
35:45
what i'm seeing is just the share level 6 billion but also the historically fairly stable revenues surprisingly
35:51
stable um but 9 billion it's a big company good sized company i should say not a big
35:57
company but also but also noteworthy is it it was fairly stable through the last console
36:02
refresh right that's that matters um and then you have the switch too sometimes these are staggered
36:08
switch was a couple years back that's stabilizing things a bit but um but anyway you see this big drop
36:14
down and this year i think because so much is going on tail end of a console cycle um people withholding purchase and so
36:20
forth and the pandemic but i think this big drop down as opposed to it being fairly stable like i
36:26
don't as opposed to it being fairly stable i think you might get a big jump next year year over year maybe i don't know
36:32
i'm just theorizing but um so anyway that's what she'll be focused on and then we also
36:38
got i like grow look at check out gross margin so gross margin is a good one because usually with companies that are
36:43
deteriorating everything's falling apart you see gross margin deteriorating as well like they can't management can't control
36:49
costs they're losing control of stuff but check out gross markets like holding up fairly well this is three or average
36:55
but even the three year average through 2020 28 it was only 27 percent in 2012 but at
37:00
the uh right before the last consoles uh the last console cycle ended and so that's pretty good they're
37:07
keeping it together and if we scroll over and start looking at individual individual years we see gross margin 29 this year above the past two years so
37:14
even despite a huge sell-off a huge decline in revenues gross margins holding up pretty well
37:19
and i see that and i think okay all right that's that's important to see right now but also is management doing a
37:24
good job right now of of um focusing on higher margin stuff perhaps that's what i'd like to say if
37:30
this were down another year be like oh it'd be less i believe less in the new management team but it's holding up okay
37:37
and like i said it's even i mean it's on par with where it was in 2014 and above 2012 and stuff that's okay that's
37:43
good but then you see sg a another important expense i i focus first on gross margin because like those costs are going to be
37:50
more difficult to manage i think but sg a i feel like this is a a more easily fixed problem um
37:57
and if you see this it's been ballooning in recent years it used to be 16 17 18 as a percentage of revenues
38:02
right and then it's been increasing past couple years part of that is because the denominator's declining right revenues
38:08
are going down but um it's not that alarming for me because it's fixable to me i feel like
38:13
you can um and i think pe firms are noticing this too i think a lot and all the activists talk about this too but
38:19
this is stuff that could be improved so it's not that i'd be more concerned with with the gross margin deteriorating than i would
38:25
be sg a margin and yes i see this big jump up and you see new management well how come
38:31
new management isn't raining this end there's a good question they need to maybe this i think this could take a little bit more time to
38:37
to to bring back and especially because of such a big decline in revenues we'll see where that it's had in the coming years but
38:43
something to keep your eye on all right so that's it and then then simple free castle so i already brought
38:48
up simple free cash flow right but let's focus if we're trying to do some forecasting just some light forecasting i promise i promise it'll be
38:54
light i think it's helpful to let's look at simple free cash flow margin
39:01
forget the aggregate numbers but if we look at what it was over the past over the past cycle right this is through
39:06
um may 3rd 2014 through today those what's that seven years we see an average if you go down here go to
39:11
average on google sheets an average of 3.4 percent um but for those first couple years you saw
39:17
an average of 4.9 but you obviously you cannot forecast
39:22
that into the future um but i like nevertheless that's a good starting point that's what i mean people
39:28
start that's the starting point you need to look at how a company's performed over the over the past
39:34
and then i think and then try to determine how has the situation changed from how it was performing
39:39
back then there's been a a meaningful change the past couple years the shift to digital right that's meaningful
39:44
um and it's so much so that not only can we not start using five percent free casual margin i don't even think
39:51
obviously the past couple years it's been much lower but i don't even think 3.4
39:58
should be used uh for forecasting i don't even think half of that should be used like i wouldn't even use three percent two
40:03
percent i wouldn't even use one percent because as a value investor i'm just trying to make sure my downside is um is protected and for that reason i
40:12
don't want to i don't want to be too optimistic of my forecast so i've i propose that we use like 20 percent
40:18
i've been thinking 20 percent of what that free cash flow margin was so instead of 3.4 percent everyone get your graphing calculators
40:24
out right uh point zero three four times point two point six eight percent now now we're
40:31
point six eight percent that's on that's lower that's almost is that the lowest if i if i add a decimal place there can i do that
40:37
0.59 so it's not the lowest but it's pretty low 0.68 percent so if we forecast out 0.68 simple free
40:43
cash flow f margin moving forward then it's also a question of which what revenue should we forecast to try to get what the
40:49
future free cash flows would be so at this point we're using the that figure so we can look to
40:54
revenues we just gotta forecast our revenues that's what i mean we're just using a simplistic cash flow analysis here simple free cash
41:00
flow margin revenues what do we think revenues will be moving forward we could say we'll get back to eight
41:07
billion nine billion i think no way right there's no way you can forecast in a taking back out the previous highs in
41:12
theory it's possible i don't even want to go down that path because i don't i'm not concerned with what's possible i'm concerned with
41:18
what's probably most likely um and so i don't even so you could maybe
41:25
we'll see a jump maybe we don't get back to eight maybe we get back to seven billion uh or maybe we get to 6.5 million remember i talked about a potential leap
41:31
this is through q1 though through q2 and q3 we should see continued declines in revenues it
41:36
will be lower than this so i propose for forecasting we free forecasts i've been thinking like 5
41:41
million in revenues over six years like or let's do six years um in that it'll be all over the place
41:49
right but if that's our average revenue figure then that's that'll be a number we can use for each year and i think that's
41:55
do you think that's decent do you think that's too high does anyone think that an average of five billion through the first six years of a console
42:02
cycle is too high for gamestop when they used to be it's almost it's not quite it's not half of what they used to
42:08
do but it seems to me somewhat conservative um as does the simple free castle module we
42:13
mentioned of 0.68 so if we use that i've already i used the online calculator just to keep it simple if i wanted to uh
42:20
to do this precisely i do in a spreadsheet but i just whip this up really quickly before i kicked off this video i don't
42:26
know if this calculator is accurate it doesn't matter because i can eyeball it and i know it's roughly in the ballpark of reality
42:31
um so what i said was i took those i did simple free cash flow margin of 0.68 times uh 5 billion over 6 years just to
42:39
keep it simple i know it will fluctuate and i get it and then i just bounced around the cash flows a little bit it all averages out
42:45
to point six eight percent um so point six eight percent times five billion is a boat i think um
42:51
was it 35 34
42:56
34 million so these averages out to about 34 35 million and then i just maybe second year they'll have the most
43:02
blah blah blah and then i use a discount rate of 20 i feel like that's pretty conservative
43:07
for the risks that are uh we're dealing with here um maybe you think it should be higher let me know
43:13
let me know but using those using these assumptions at least i'm showing you my assumptions this is what i mean
43:19
is that i see some bearish um some bearish gme comments and articles and stuff i
43:24
think just show me your numbers because i want to try to uh compare to what i'm getting maybe you think the company cannot
43:29
generate positive free cash flow moving forward i feel like a lot of people might think that but based on all that stuff that i
43:34
showed previously of this of all these things that like the
43:40
fundamental events that have been unfolding positively and why i think some stuff is overdone like you would have to explain to me
43:46
that man you'd have to say management cannot get a control of this stuff or physical they'll have zero interest within a
43:52
couple of years you'd have to be pretty bearish like you'd have to for this to be for this for these numbers that i
43:57
used to not be conservative you'd have to have the like one of the most bearish outcomes that could possibly happen doesn't mean
44:03
it can't happen it absolutely can happen but uh it just seems unlikely that that's what's what it's gonna unfold so
44:10
if this unfolds then you have present value of about 125 million plus the book value of about
44:16
let's just call it 400 million that's what i was trying to get at here then you're getting at 500 million
44:21
that's twice what the market cap is that's twice the market cap and so
44:26
that's what i think i think about gamestop i think it is it is at least a double i think
44:32
it is probably a triple but it legit could be a four to five bagger it could be
44:37
looking out i don't know looking out six to eighteen months or so um yeah so that's what i think if you
44:43
disagree with that that's fine i like i said i've been wrong about plenty of things in the past um
44:48
but i just i see has to impermanently see scion's analysis and i see my own analysis and that we all it strikes me as we're
44:55
security analysts and we're looking at this and then i get really i don't so i mean i try to come up with why it's trading where it is because i'm really
45:00
confused because i feel like other people either we're all wrong or everyone's looking at
45:05
the wrong stuff and if they've gotten the wrong impression which i've seen happen before but this is this is something this is something
45:12
because it's some of the biggest it's one of the biggest misperceptions i've seen in a while i think
45:17
ever maybe i don't know um maybe not ever i don't know but um okay so that's that so let me
45:23
know if you disagree and if you think they can't generate positive cash flow i'd be interested about that like if you think they're done
45:29
and that this is it and that they cannot do it that that's that'd be interesting to me so let me know again either in the comments to this
45:34
video or um or let me know on twitter or in the live stream or wherever the other
45:40
we talk about fundamental events right so this is the thing you see in my other videos i do uh i'll do some technical analysis and i
45:45
incorporate that into my approach but if you're really trying to make some big gains and stuff where you make the most money it's
45:51
through fundamental analysis positions like this where i'm digging into the details and i'm using technical analysis
45:57
to us to facilitate the position sometimes it is my focus sometimes technical analysis is my focus but i'm not making
46:03
the biggest money on on that type of a position um that's why you see me digging through
46:09
a lot of the fundamental stuff because it's a bigger position just because of positions in the roaring kitty model portfolio it doesn't mean i'm spending
46:14
this much time on all the positions it's just the ones that are of higher interest to me anyway now to just pull up the chart do
46:20
i already have it open i think i do um right there so here what is this this is let's do the monthly chart because
46:26
it's a monthly chart the technical analysis they see this they think oh this is terrible especially last year they saw this that you can't
46:31
touch this stock you can't touch this this looks terrible it still looks terrible from from the perspective of many technical analysts although you can
46:37
see the rsa turning a bit here it's starting to level off nevertheless oh and this was with
46:42
let's if we do oh if we do the um we can adjust for dividends by doing
46:48
this i like to do this sometimes so a dividend adjusted we were over 50 dollars back in 2013 and remember oh i
46:54
didn't even mention just remember those share count that i when i set up things that have kept my attention the share count it's been it's
46:59
been halved it's been half since the uh the previous console cycle so something to bear in mind when you look at these historical
47:05
prices and they also have enough cash and authorization to purchase another 100 million dollars worth of shares
47:12
which could get the share countdown to 40 million i don't think it's likely right now but there's a case to be made that they
47:18
should so just something to keep around for i don't think it's likely right now july 2020 i don't think it's going to happen this year but it's a possibility
47:24
if it happens look out because um yeah because that's that's going to change it even more
47:30
when you're buying back shares it's so important to buy it back below i mean book value per share or fair
47:35
value per share more importantly and because i think fair value per share is quite a bit higher i it can be a good
47:40
thing to buy back these shares and if they do it increases the per share value even more than it would otherwise so
47:45
something to keep your eye on but um um sorry i lost the chart there so here's the chart there's a good it
47:51
doesn't look that good in the monthly but starting to flatten out a bit you see the rsi moving up so if we switch it down to weekly just a three year weekly
47:58
now it starts to get kind of interesting because now it's starting to build a base right look at this uh again it was looking kind of sketchy last year and
48:05
then it comes back down then it had that big sell-off but this is the thing when you're looking at a chart you can't look at it in isolation everyone should everyone
48:11
who analyzes charts should know this i see this you think oh look at that big self what happened that week and yes they did report earnings that week but
48:17
everything was selling off that week it was a double they were retesting companies like gamestop and um some
48:22
some some of the companies i dealing with were retesting the lows that week um that first week of um last week of
48:29
march first week in april they were retesting lows anyway gamestop bounced right back it was only one week down then it comes back now it's flattening out around four
48:36
bucks so i see this i think it's building the base um it doesn't mean that's how it's going to
48:41
work out but i just mean along that base watch out because it could it could take off and then you look at a
48:46
one and a half daily and then uh you get to here if you can get to five maybe they fill the gap and
48:52
stuff we don't need to get into that that's not the point that obviously this is a fundamentals focused thesis right so why
48:57
am i even pulling up the chart just to show that things kind of feel like they're changing a little bit and because if if the chart does change a
49:03
bit and it starts to look more bullish you get other people who are piled into into it as well just not just the longer term fundamentals
49:10
focused people that's why i kind of look at this stuff because i know other people are too and if that chart turns um just people could start piling on and
49:16
then you get the short interest too i didn't want to go into hopefully it's clear the short interest wasn't a isn't a
49:22
a main point to this thesis but you need to acknowledge it it's out there could it be unwound in a systematic
49:28
manner so that nothing happens yeah probably but this is i mean i don't know enough about the mechanics of the market to uh
49:33
to be sure about that type of thing i'm not betting on a short squeeze but it seems like something where it could take place
49:39
although i think if you want a real short squeeze you'd probably want a more levered company where people were truly like it was on the verge of bankruptcy
49:45
and then suddenly it's not gamestop i don't know well you just got to see what happens but it would be nice if it
49:51
goes up really quickly but when you see all this stuff kind of adding up you need to at least consider it take it into consideration but
49:57
you have to start tart if we get closer to this one i mean we're in july console cycle's right around the corner it's still priced in the gutter it's pretty
50:03
impressive to me but next couple months maybe sentiment will start to turn char will start to turn up people start
50:08
seeing that uh i feel like people start seeing buries involved too that could help because um he's a legitimate successful value
50:15
investor knows his [ __ ] and see the activists and the management's making moves and stuff uh maybe it could happen in the this by
50:22
the end of 2020 but um probably with the thesis should unfold fully within 18 months if it
50:27
doesn't happen by then i don't know i do think gamestop is going to be it seems likely to me it's going to be bought out by a pe firm who sees what i
50:34
see and thinks all right we let's take this thing private and start um we can start taking out the free cash flows and stuff
50:39
i think that'll happen it they it almost happened a couple years ago in 2018 and at that time it was priced it looked
50:45
like the it would have been bought out between 1 billion and 2 billion something in that range 1.5 billion since then the share counts been whacked
50:52
quite a bit so if that were fair value then we're looking at a much higher stock price but what would it when would it happen
50:58
couple two years from now a year from now at this point i don't think it's gonna happen before the console i don't think
51:04
it's gonna happen before november so i don't know i think it's i think that's where this company's going but i don't know the timing of it
51:09
um but yeah a lot a lot of moving parts here so i think that's it and then finally
51:16
just some things that uh that i don't think are even i don't even talk about them because it's not a big part of my thesis i'm just trying to
51:22
make sure gamestop's still relevant and that it can generate some free cash flow but there's a whole bunch of um upside
51:27
potential that's 100 seemingly 100 discounted even i discounted myself because i can't except for the first one extended
51:33
interest and physical games as compared to like music and movies and stuff because people compared to that stuff and say oh it's going the same way
51:39
but i mean as long as there's interest in november of 2020 and for the next year or two then
51:44
gamestop's likely going to generate free cash flow in my biased opinion if you want to call it that but i mean what if it what if it
51:50
goes on even longer than one or two years what if it goes five years or ten years um because people want those physical
51:56
games i mean it's that's a similar case to movies and dvds but um excuse me dvds and cds and so forth but
52:03
what if um this console storage limitations could that persist games will only get
52:09
increasingly complex over time so is there a case to be made that they'll get so complex it'll be difficult to store
52:15
200 games on a system then you've got to delete them stuff it will be simplified longer term in the future but i'm just
52:20
thinking five years what if there's still quite a bit physical demand looking on five years or 10 years 20 years i wouldn't bet on that
52:27
but five years i'm like it could be 10 years maybe but probably not as much i i'm anyway that's so i'm just pointing that
52:34
out that everyone's pretty much pricing in this this right now people are pricing in that there's like no interest right now which
52:39
i think is a really aggressive bear case to make i i don't understand how anyone can be short game
52:44
stop at four dollars that is really really risky really risky and yet you see a huge
52:50
short position i think that's the bigger firm's trying to generate some extra income but i'm like oh my i see this i think what are you thinking
52:55
what do you think in short and gamestop at this price point right now a couple years ago okay maybe if it rises again
53:01
but right now what you're pricing in like a really apocalyptic scenario for game stop which
53:07
could happen but i don't i wouldn't feel comfortable betting on that so that's what i mean if it's if it's even just a little bit better
53:12
than that that's not being priced in then barry mentioned and other people mentioned two higher margin revenue streams via vendor partnerships i don't
53:18
even know what that looks like um but barry mentioned it so that's a possibility i know they got reggie on
53:23
the board too and they've been talking with microsoft about stuff but what what are the details what are the details of that
53:28
what could that be could someone team up with gamestop so that it changes the business model a bit
53:33
so that it could it could it could survive even longer i don't know i'm not really pricing it in but i know
53:39
it's a distinct possibility um and then just if they do what if those test stores and tulsa work out
53:45
they become something and i know with the pandemic too here they are trying to build a social gaming hub and stuff and uh
53:51
but this is a thriving industry and gamestop's the only brick and mortar retailer and the retailer dedicated to well brick and
53:57
mortar retailer dedicated to it has a presence and um seems like there could be something there i don't know if there is but
54:03
can you imagine can you envision it i know people can envision it i'm just saying for this bullet point list here that i'm not saying
54:08
is a big part of the thesis as is hopefully clear at this point of the video but it's a possibility a distinct
54:13
possibility that you at least should talk about and if stuff like this ever happened then if you're looking out two three
54:19
four years gamestop could be the stock price could be quite a bit higher especially after all those sharer
54:24
purchases and so forth um so yeah there's just additional things that could be that could be
54:29
factored in i think that covers most of the big items um
54:34
and again if you check out the other the other commentaries and letters and so forth for additional information i
54:39
covered some of the ones that i consider more important to me there's other things too maybe i did miss something important i don't know i'm losing track
54:45
but uh yeah let me know your thoughts if you'd see a blind spot or if you think i'm missing something or if you strongly disagree with stuff like especially my
54:52
forecasts and stuff or you think i'm i'm blindly bullish or that i'm i'm i'm biased and stuff yeah let me
54:58
know your thoughts and uh in the comments of this in the in the live stream on twitter wherever because
55:03
i want to be sure i'm right about this i feel like we are but i've been wrong before so i
55:08
i try to do as much analysis as i can to be as confident in the position as possible so
55:13
that's it i hope you liked this first video of the the the kitty corner here and in gamestop and let's see if it's an
55:19
exciting final few months of 2020 and um yeah tune in for more videos about other companies probably won't be
55:25
as long as this one but i hope hoping to share my thoughts on some stocks just to give you some insight into where i'm at with things
55:30
but that's it thanks for watching and i'll see you around
56:31
you