GameStop (GME)

Video game retailer GameStop (NYSE:GME) beat Wall Street’s revenue expectations in Q2 CY2025, with sales up 21.8% year on year to $972.2 million. Its non-GAAP profit of $0.25 per share was 61.3% 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.

Note that our analysis is rooted in fundamentals, not meme-stock technicals.

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).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years.

With $3.85 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 struggled to generate demand over the last six years (we compare to 2019 to normalize for COVID-19 impacts). Its sales dropped by 11.2% annually, a rough starting point for our analysis.

This quarter, GameStop reported robust year-on-year revenue growth of 21.8%, and its $972.2 million of revenue topped Wall Street estimates by 18.1%.

Looking ahead, sell-side analysts expect revenue to decline by 13.4% over the next 12 months, a slight deceleration versus the last six years. This projection is underwhelming and implies its products will see some demand headwinds.

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

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 28% gross margin over the last two years. That means GameStop paid its suppliers a lot of money ($72.01 for every $100 in revenue) to run its business.

This quarter, GameStop’s gross profit margin was 29.1%, down 2 percentage points year on year and missing analysts’ estimates by 5.3%. On a wider time horizon, however, GameStop’s full-year margin has been trending up over the past 12 months, increasing by 3.8 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold.

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 was profitable over the last two years but held back by its large cost base. Its average operating margin of 1.6% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, GameStop’s operating margin rose by 3.9 percentage points over the last year.

In Q2, GameStop generated an operating margin profit margin of 6.8%, up 10.4 percentage points year on year. The increase was solid, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, and administrative overhead grew slower than its revenue.

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 impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 5.1% over the last two years, better than the broader consumer retail sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that GameStop’s margin expanded by 13.8 percentage points over the last year. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

GameStop’s free cash flow clocked in at $113.3 million in Q2, equivalent to a 11.7% margin. This result was good as its margin was 3.4 percentage points higher than 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 12.7%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer retail sector.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

GameStop is a profitable, well-capitalized company with $8.69 billion of cash and $4.26 billion of debt on its balance sheet. This $4.43 billion net cash position is 42.7% 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.

It was good to see GameStop beat analysts’ EPS expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. On the other hand, its gross margin missed. Zooming out, we think this quarter featured some important positives. The stock traded up 2.1% to $24.10 immediately after reporting.

Updated: December 4, 2025 at 9:41 PM EST

Before making an investment decision, investors should account for GameStop’s business fundamentals and valuation in addition to what happened in the latest quarter.

We cheer for all companies serving everyday consumers, but in the case of GameStop, we’ll be cheering from the sidelines. For starters, its revenue has declined over the last three years. And while its EPS growth over the last three years has significantly beat its peer group average, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses.

GameStop’s P/E ratio based on the next 12 months is 26.7x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment.