GameStop's 'Large Cash' Position Keeps BofA On The Sidelines

GameStop Corp. GME said earlier this week it will no longer seek offers to sell itself to a strategic buyer, which removes the "cleanest way" the company could have generated value to shareholders.

The Analyst

Bank of America's Curtis Nagle maintains a Neutral rating on GameStop with a price target lowered from $18 to $12.

The Thesis

GameStop's stock no longer benefits from a major floor or valuation support now that a sale of itself is off the table, Nagle said in a research report. This doesn't suggest the bearish case for the stock can be applied, however, as the company is sitting on a "large cash pile" of $1.6 billion. This is 40 percent higher than its current market cap and large enough to pay back the entire debt load.

Nagle said GameStop remains a free cash flow positive company, although it's declining and could prompt the company to suspend its dividend which would free $90 million a year in cash. There's also no evidence GameStop can unlock shareholder value through direct investments in its business as 2019 looks like a "very tough year" due to competition from digital sales of video games, weak hardware sales at the end of the current cycle, a slowdown in the collectibles category, and very tough compares in accessories.

GameStop continues operating without a fulltime CEO and any future leader will have a "tough seat to fill" due to weakening fundamentals.