GameStop (GME)

Video game retailer GameStop (NYSE:GME) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 16.9% year on year to $732.4 million. Its non-GAAP profit of $0.17 per share was significantly above analysts’ consensus estimates.

Company Overview

Drawing gaming fans with demo units set up with the latest releases, GameStop (NYSE:GME) sells new and used video games, consoles, and accessories, as well as pop culture merchandise.

After a long day, some of us want to just watch TV, play video games, listen to music, or scroll through our phones; electronics and gaming retailers sell the technology that makes this possible, plus more. Shoppers can find everything from surround-sound speakers to gaming controllers to home appliances in their stores. Competitive prices and helpful store associates that can talk through topics like the latest technology in gaming and installation keep customers coming back. This is a category that has moved rapidly online over the last few decades, so these electronics and gaming retailers have needed to be nimble and aggressive with their e-commerce and omnichannel investments.

Competitors offering video games and video game accessories include Best Buy (NYSE:BBY), Walmart (NYSE:WMT), and Amazon.com (NASDAQ:AMZN).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $3.67 billion in revenue over the past 12 months, GameStop is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.

As you can see below, GameStop’s demand was weak over the last six years (we compare to 2019 to normalize for COVID-19 impacts). Its sales fell by 12.3% annually, a rough starting point for our analysis.

This quarter, GameStop missed Wall Street’s estimates and reported a rather uninspiring 16.9% year-on-year revenue decline, generating $732.4 million of revenue.

Looking ahead, sell-side analysts expect revenue to decline by 6% over the next 12 months. it's tough to feel optimistic about a company facing demand difficulties.

GameStop has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 27.6% gross margin over the last two years. That means GameStop paid its suppliers a lot of money ($72.37 for every $100 in revenue) to run its business.

This quarter, GameStop’s gross profit margin was 34.5%, up 6.8 percentage points year on year and easily exceeding analysts’ estimates. GameStop’s full-year margin has also been trending up over the past 12 months, increasing by 5.1 percentage points. If this move continues, it could suggest a favorable environment where the company has less pressure to discount products and stable or shrinking input costs (such as labor and freight expenses to transport goods).

Operating margin is an important measure of profitability for retailers as it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.

GameStop’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same. The company broke even over the last two years, inadequate for a consumer retail business. Its large expense base , inefficient cost structure, and low gross margin were the main culprits behind this performance.

Analyzing the trend in its profitability, GameStop’s operating margin might fluctuated slightly but has generally stayed the same over the last year, meaning it will take a fundamental shift in the business model to change.

This quarter, GameStop generated an operating margin profit margin of negative 1.5%, up 4.3 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

GameStop has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 2.2% over the last two years, slightly better than the broader consumer retail sector.

GameStop’s free cash flow clocked in at $189.6 million in Q1, equivalent to a 25.9% margin. Its cash flow turned positive after being negative in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

GameStop’s five-year average ROIC was negative 19.3%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer retail sector.

Companies with more cash than debt have lower bankruptcy risk.

GameStop is a profitable, well-capitalized company with $6.39 billion of cash and $1.76 billion of debt on its balance sheet. This $4.62 billion net cash position is 34.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly GameStop blew past analysts’ gross margin and EPS expectations this quarter. It also purchased 4,710 Bitcoins between May 3, 2025 and June 10, 2025. On the other hand, its revenue missed. Overall, this print had some key positives. Investors were likely hoping for more, and shares traded down 3.2% to $29.21 immediately after reporting.

Updated: June 20, 2025 at 10:28 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in GameStop.

We cheer for all companies serving everyday consumers, but in the case of GameStop, we’ll be cheering from the sidelines. To kick things off, its revenue has declined over the last six years. On top of that, GameStop’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, and its operating margins reveal poor profitability compared to other retailers.

GameStop’s P/E ratio based on the next 12 months is 46.9x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $13.50 on the company (compared to the current share price of $23.49), implying they don’t see much short-term potential in GameStop.