GameStop's latest 'crazy' move; A lot of uncertainty and negativity, but we're still likely to avoid a recession this year
1) On a down day for the market yesterday, video game retailer GameStop (GME) popped nearly 12% after announcing that it's going to adopt the approach from MicroStrategy – which changed its official name to Strategy (MSTR) – of buying bitcoin...
This Wall Street Journal article from yesterday has more details: GameStop's Rapid Shrinkage Is Paying Off. Excerpt:
[The stock's jump was] likely helped by the decision to add bitcoin as a treasury asset. That move strongly suggests GameStop won't use its $4.8 billion cash hoard to figure out new ways to sell games in stores.
Indeed, GameStop's latest annual report now says its top strategic priority is to use its cash and other financial firepower to "maximize shareholder value," including through potential investments or acquisitions.
Selling games could soon become a side hustle.
(I'll note that today, GME shares are giving back those gains from yesterday.)
My initial reaction to this news is disgust: It looks like a shameless attempt to try to – once again – turn its stock into a meme stock, which will surely suck in an untold number of gullible investors right at the top and incinerate them.
But upon further reflection, the strategy the company is pursuing isn't unreasonable, given that its core video game retailing business is in full-scale collapse (revenue was down 28.5% year over year in the most recent quarter reported on Tuesday).
The first part of the strategy is to generate as much cash as possible from the dying business – for example, as Netflix (NFLX) did with its original DVD-by-mail business.
GameStop is doing this well: It's closing stores (down 23% last year) and cutting its costs even faster than its sales are shrinking, such that its net income in the last quarter more than doubled to $131.3 million, and free cash flow was even higher at $158.8 million.
As a result, the company's cash hoard – roughly $4.8 billion, minus about $400 million of debt and lease obligations – is growing. And it's set to grow by an additional $1.3 billion thanks to an offering of convertible senior notes. (The WSJ has more details in this article: GameStop to Offer Convertible Notes Ahead of Bitcoin Investment.)
That's a lot of dry powder for a company with a roughly $11 billion market cap.
Netflix became one of the great investments of all time – its stock is up nearly 125 times since it bottomed at $7.78 per share on October 1, 2012, the day I pitched it as my favorite idea to the 500 attendees of my Value Investing Congress (you can see the slides I presented here) – because it reinvested the cash from its dying business into a fantastic, dominant global streaming business.
But GameStop instead appears to be planning to speculate on bitcoin. That's not for me... but I would never short this stock.
Just look at what has happened to Strategy's stock since it started buying bitcoin in 2020:
That's a wild ride, but ultimately an extremely profitable one for shareholders who hung on for it (I strongly recommend avoiding it anywhere near today's price, as I outlined in my January 28 e-mail).
2) The amount of uncertainty and negativity among both corporate leaders and consumers is very high right now. Here are some data points:
First, this WSJ article from earlier this week: Corporate America's Euphoria Over Trump's 'Golden Age' Is Giving Way to Distress. Excerpt:
Rapturous applause and a sea of phones in the air greeted President Trump as he walked on stage and declared, "The golden age of America has officially begun."
He was barely a month into office when the Saudi-backed investor conference in Miami captured the optimism. "The Nasdaq is up nearly 10% in just a few months," Trump said, ticking through a list of economic indicators. "The Dow Jones Industrial Average is up 2,200 points." On the same day, Feb. 19, the S&P 500 hit an all-time high.
Of course, we know what came next. As the article continues:
But as Trump unleashed an on-one-day, off-the-next tariff fight with America's largest trading partners, those gains unraveled. In just a few weeks, the S&P lost $4 trillion in value driven by his whipsaw trade policy, receding optimism about an artificial-intelligence boom and souring consumer sentiment caused by threats of higher prices and weaker growth. A measure of consumer sentiment fell in March for the fourth straight month to the lowest level since January 2021, the Conference Board, a business-research group, said Tuesday.
Markets in the past week have recovered some losses, but Trump is preparing his next shock: an April 2 "liberation day" suite of reciprocal tariffs he said will be applied on any trading partner that charges tariffs or imposes other trade barriers on U.S. products.
CEOs and lobbyists seeking clarity and fretting over what they see as a haphazard approach have inundated Trump's team with calls, according to people in the administration.
And as this post from yesterday on social platform X notes, the oil and gas industry has been roiled by uncertainty:
And as another post on X notes, corporate CFOs are also pessimistic:
Consumers are pessimistic as well. Take a look at the chart from this post on X from Liz Ann Sonders, chief investment strategist at Charles Schwab (the blue line indicates consumers who think business conditions will get better in the next six months... while the yellow-orange line indicates those who think conditions will get worse):
However, note the past two times the yellow-orange line spiked: during the COVID-19 crash in early 2020 and the big market decline in 2022. Both were fabulous times to buy stocks.
I don't think today is a "fabulous time" to buy in general... but as I've written many times this year, I'm not running for the hills either.
I think the betting markets are correct that we'll likely (albeit slightly) avoid a recession this year – the latest odds from Polymarket stand at a less than 40% chance.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.