On Tuesday March 21st after the market closed. GameStop stock skyrocketed on its fourth Quarter 2022 earnings report. The company reported a stunning comeback to profitability in the quarter, earning 50 million dollars of net income. This pushed us talk up as much as 40 and after hours trading the next day, Gme stock reached an intraday High 50 above its previous close.

This comes two years after the famed Meme Stock short squeeze of 2021 and the resulting wave of negative coverage over Meme stocks. Market Commentators have ridiculed GameStop for the surging at stock price, labeling shareholders as incompetent gamblers. But over the past year several major changes have been made by the company in an attempt to maximize his chances of returning to its Glory Days Ryan Cohen The billionaire activist investor overhauled the entire C-suite at the company with former Amazon Executives and other highly credentialed leadership. Many changes were made to the company, including Cost Cuts and a pivot towards E-commerce They even jumped head first into what many believe to be the new Frontier of online gaming blockchain-powered Nfts.

But with the disastrous collapse of their partnership with FTX and no solution to the inevitable decline of brick and mortar gaming retail, serious questions remain about game satisfiability going forward. So was GameStop's dramatic fourth quarter comeback a Vindication of the company against all of its doubters or is it just a blipping is still intact Thesis that GameStop is ultimately heading towards zero GameStop's impressive comeback to profitability in the fourth Quarter was almost entirely driven by Cost Cuts Beginning in 2020, GameStop Embarked on a wide sweeping campaign to reduce the company's fixed costs. In 2021 alone, the company permanently closed 243 of its worst performing stores. It also has aggressively laid off workers both from its retail locations and from its corporate headquarters in Texas.

Together, these cost cutting measures were enough to completely erase last year's fourth quarter 150 million dollar net laws, with an extra 50 million dollar profit left over. Thus, with no growth in the business and in fact, a one percent decline in total sales from the previous year, GameStop was able to reduce expenses enough to swing from a 150 million dollar deficit to a 50 million dollar profit. This turnaround didn't happen automatically or overnight. There were the results of over a year of change at the highest levels of the company.

Starting with his chairman: Ryan Cohen In April of 2021, GameStop shook up its entire leadership team, including replacing the CEO and CFO and voting Ryan Cohen as chairman of the board. The new CEO and CFO were both former. Amazon Executives GameStop also brought in a new Chief Operating Officer Chief Technology officer and Chief growth officer Cohen hand-picked top Executives at his company Chewie To round out the team, including the new Vice Presidents of Brand Marketing and of merchandising. The new team at GameStop immediately made fundamental changes to how the company operated.

The board of directors became paid 100 in the form of GameStop shares rather than cash. This aligned them to the interest of shareholders and created a strong incentive to bring the company back to profitability and growth. Their first order of action was acting on the elevated Gme share price to sell millions of dollars worth of stock in less than a month. The company then used the proceeds of the stock sale to eliminate almost all debt from its balance sheet from the beginning of 2021 to the beginning of 2022.

GameStop was able to reduce its total debt by a factor of 10 from about 400 million dollars to only about 40 million dollars. Their only remaining long-term debt today consists of a loan from the French government for coveted relief, which carries extremely favorable financials including low interest. This has been extremely accretive for GameStop since it had previously been paying a significant percentage of its gross profit as interest payments. Before that, in just the first quarter of 2021, they incurred about 25 million dollars of interest expense.

In 2022. quarter one interest expense was less than one million dollars, and in the most recent reported quarter, they actually made a slight positive net interest income since higher interest rates have allowed them to make a small return on their cash position. So before even making any changes to the company's operations, GameStop's new leadership, with the help of retail Traders Pumping up the stock was able to permanently add tens of millions of dollars to the company's annual profitability. GameStop also began closing its underperforming brick and mortar stores hand over fist for the beginning of 2021 to 2022, the company closed a total of 243 stores worldwide As a transitioned to focus more on e-commerce These store closures resulted in millions of dollars of savings in the form of lease, liabilities and salaries.

At the same time, In 2022, they announced multiple initiatives to take GameStop into the future of gaming retail. In May they launched their own cryptocurrency and Nft wallet and in July they launched their own Nft. Marketplace. The vision was that GameStop would be the center for Nft's minted, traded and used inside of video games.

This blockchain Marketplace vision would be the future of a company that was formerly a Physical Games. Marketplace GameStop has released very little information on the results of its transformation into E-commerce and Nfts. However, there are reasons to be nervous about its chances of success. Nfts and Crypto in general have become a shell of their former selves and Nfts now look like they may have just been a fad.

In just a couple of months after GameStop announced a partnership with FTX Sam Bakeman Freed happened. so if it weren't for GameStop's successful cost cutting and return to profitability the last few months would not have looked very good at all for the company's initiatives. Foreign If GameStop's recent return to profitability was entirely caused by store closures and job cuts, and their growth initiatives don't seem to be panning out just yet. the multi-million dollar question becomes: is this positive development sustainable? Given the circumstances, the reality is somewhat mixed.

On the positive side, their balance sheet is now vastly improved and they have to make no interest payments unless they borrow more money. The savings from laying off workers and closing hundreds of stores are also ongoing savings that will be accretive to Future earnings. However, one good quarter doesn't mean they're out of the woods yet. The fourth Quarter is when Gamestop seasonally has their highest sales and operating profit since it includes the holiday gift giving season.

For them to continue this quarter's profitability through to the rest of 2023, they'll have to find even more ways to reduce their expenses. On the bright side, a large portion of their cost cutting is classified as cost of sales. GameStop has said that much of these expenses are made up of freight and credit card fees associated with their e-commerce operation, which may be becoming more efficient as they build out their e-commerce Ideally, this will mean that their lower Revenue in the first second and third quarters will be partially offset by lower cost of sales. Looking past the next few quarters, GameStop's return to growth will hinge on the success or failure of its shift to e-commerce They've already invested in their e-commerce infrastructure with a new fulfillment center in Nevada.

The new leadership has also pushed GameStop's presence and collectibles like Funko They're up against Sif competition from the likes of Amazon and Walmart and nowadays most new video games are directly downloaded online from platforms like PlayStation and Xbox. But Ryan Cohen's leadership team is made up of former execs from Amazon as well as his own company Chewie which has been massively successful in E-commerce right now, it's still too early to tell if it will work. In the wake of the 2021 short squeeze in GameStop stock, many Market commentators like to point out the company's weak financials. it's been called a Left 4 Dead brick and mortar retailer in the age of Amazon.

There is also probably some stigma involved of the gamer Community as well as the perception that many of the Wall Street bets traders who pumped up GameStop were themselves degenerate video game players. And it is true that at least based on traditional valuation metrics with its current fundamentals, GameStop is highly overvalued. It currently has a market cap of about 7 billion dollars. Compare that to revenue in the last 12 months of 6 billion dollars, which only generated a 50 million dollar profit in the fourth quarter.

Even if they are able to make a 50 million dollar profit in each of the next three quarters, which will be very hard to do, that would imply price to earnings multiple of 35.. So, even in an optimistic scenario, the company is richly valued for it to justify its current stock price, GameStop's transformation must come to fruition. It's probably fair to say that GameStop has to some extent proved its doubter is wrong. Many people thought that the company was a zombie on its way to zero, but the meme stock Mania became a self-fulfilling prophecy that allowed it to extinguish its debt, bringing new and energetic leadership, and ultimately prove that it is still capable of making a profit.

It's still a long way off from its Glory Days of the early 2010s when it minted hundreds of millions of dollars of profit every year. It's also a long way off from the visions of thousands of shareholders of GameStop Reinventing itself in the digital age. But such is also the case with any number of publicly traded companies struggling to become profitable today, none of which had as many haters as Gamestop. Regardless of what Gme's stock price is, it can no longer be denied that GameStop is indeed a real business with a real chance of success.

Alright guys, that wraps it up for this video. What do you think about GameStop's return to profitability? Do you think they have what it takes to maintain their Newfound success? Let us know in the comments section. Below In the meantime, thank you so much for watching and we'll see in the next video. Wall Street Millennial Signing out.