GameStop (GME) shares are down nearly 20% on Thursday on the news that the company fired CEO Matt Furlong after two years on the job. It didn’t help that GameStop delivered terrible quarterly results.
Handpicked by RC Ventures wunderkind Ryan Cohen, Furlong is out, and the co-founder of Chewy (CHWY) is in as executive chairman. Cohen will be responsible for capital allocation, evaluating potential investments and acquisitions, and overseeing the managers of the company’s holdings.
“We believe the combination of these efforts to stabilize and optimize our core business and achieve sustained profitability while also focusing on capital allocation under Mr. Cohen’s leadership will further unlock long-term value creation for our stockholders,” CNBC reported the company’s filing stated.
As I look at GameStop’s unusual options activity on Thursday, I see a group of retail investors that can’t break their addiction to lousy meme stocks.
For several reasons, I wouldn’t touch GME stock now or in the future.
The Insane Are Running the Asylum
In my Barchart.com commentary over the past year, I've been very open about my disdain for the company, its stock, Ryan Cohen, and the cult-like meme-stock investors that support its share price.
In December, I discussed how the company’s latest job cuts were just another sign that Ryan Cohen didn’t know what he was doing with GameStop.
“According to Axios, the company’s crypto team is where most of the losses are happening in this latest round of cuts,” I wrote on Dec. 7, 2022.
“... Amazingly, despite clear signs the emperor (Chairman Ryan Cohen) has no clothes, GameStop stock remains annoyingly above $20.”
In this respect, nothing’s changed. Despite the near-20% fall in its share price, it’s currently $1.38 above $20. This is for a company that may never be consistently profitable and whose sales are crumbling.
In March, I wrote about the stock’s unusual options activity after GameStop reported better-than-expected quarterly results.
“In the end, GameStop’s fundamental task is to re-ignite top-line growth. Unfortunately, it’s yet to do that. As recently as fiscal 2015 (Jan. 2016 year-end), GameStop had $9.3 billion in revenue. It was $5.93 billion in 2022,” I wrote on March 23.
Then CEO Furlong spoke glowingly about the company’s efforts to cut costs and optimize the customer experience. Furlong was hired by Cohen et al. because of his Amazon (AMZN) background and potential to grow its online business. He was fired after two years, clearly failing to meet his potential.
Or, was he given the impossible task of reviving a retail brand whose best days were behind it? It’s probably a little of both.
The actions taken at the behest of Cohen over the past couple of years might have given the company more time to figure things out, but it has been unable to take advantage of this.
Cohen’s Not the Right Person for the Job
The smartest thing Ryan Cohen has done since co-founding Chewy in 2011 was selling it to PetSmart less than six years later for $3.35 billion. Chewy has lost nearly $1.1 billion in the seven years since selling.
I’ve always thought that Cohen did a good job building that particular business, but it turns out that it could have been more about timing than operational and business-building skills. Just look at the demographics of pet ownership and spending on pets in the past decade.
A rising tide lifts all boats. But it’s meaningless without profits. I look at Wayfair (W) in the very same light. Lots of revenue growth, but that doesn’t pay the bills.
A couple of interesting points from the company’s SEC filings.
First, it announced that it hired Mark H. Robinson as the company’s General Manager. Robinson’s been with GameStop since 2015. Before joining the company, he was a corporate lawyer. He currently oversees the legal and human resources responsibilities. He is the company’s executive officer until a permanent CEO can be found.
I don’t know Robinson from Adam, but he’s not what’s needed at this point in GameStop’s history. It requires a real leader with omnichannel chops. Once again, Cohen’s saying, “Trust me.”
If you’re smart, you won’t.
Secondly, and this probably won’t get much play in the media, the size of the board with Furlong’s dismissal drops to five. How many companies with billions in revenue have just five directors? Cohen’s one of them. His firm owns 12% of the stock. How can it say with a straight face that its board is independent? It can’t.
This whole thing reeks of incompetence.
What’s So Unusual?
As I write this midday, GameStop’s top option for unusual activity on Thursday is the July 19/2024 $35 call with a $2.81 ask price. The volume is 1,650, nearly 127x the open interest. Investors are betting that its stock can jump to $37.81 in a little over a year.
A $281 downpayment for 100 shares isn’t a big deal. That’s about 13% of the current share price.
However, I am trying to understand why someone would make this bet with so many other stocks available whose businesses are in far better shape. I do.
If this isn’t the Titanic, it’s undoubtedly the Lusitania. It’s going down.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
