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FutureStarrHow Will Matt Furlong's Sudden Departure Affect GameStop's Future?
GameStop was once the go-to place for gamers looking for new video games and consoles, with an added benefit for those already owning copies by offering trade-in options for used copies they already owned. GameStop, however, has seen its relevance wane significantly as more gamers opt for digital downloads rather than purchasing their titles at retail stores. How Will Matt Furlong’s Sudden Departure Impact GameStop’s Future? GameStop is an icon in the gaming industry and popular electronics and technology brands alike, and a household name for many consumers. Based in Texas and with stores often found within malls across the U.S. and Europe, it offers gamers access to new releases while trading in old games they no longer play for newer ones. Unfortunately, though, the company has encountered significant struggles over recent years and many investors are anxiously waiting to see what comes next. GameStop made headlines earlier this week when it made an unexpected move: replacing CEO Matt Furlong with Ryan Cohen as "executive chairman". That announcement sent shares plunging by over 20% postmarket trading and caused further turmoil for GameStop stock. The decision comes following several disappointing financial results for the company, such as its quarterly loss that exceeded analyst estimates and revenue declines. GameStop's revenues have decreased for four consecutive quarters, which is alarming given its dependence on retail stores for sales; as more customers move toward digital platforms like Steam or GOG it becomes harder and harder for GameStop to remain relevant in today's market. GameStop's physical store-only business model has proven problematic since 2016, when competition from Amazon and digital downloads became greater than anticipated. As a result, investors have begun to lose faith in the company. Shares for it fell sharply in early 2021 during an intensive meme-stock trading frenzy, when some speculated it may vanish altogether. Unfortunately, GameStop's fears were well founded and it is now struggling for survival. Investors have already started selling shares, while hedge funds and professional short sellers exert immense pressure. If things don't change rapidly it seems as though GameStop will soon go under. The Impact on Shareholders GameStop (GME) shares fell nearly 20% Wednesday following news that its quarterly loss had exceeded estimates, as well as its decision to dismiss CEO Scott Tripp. Furthermore, billionaire investor Ryan Cohen who co-founded online pet product retailer Chewy as executive chairman was appointed. As Matt Furlong joined GameStop in 2021, many on Wall Street saw it as an outdated retail business on its way towards bankruptcy. Brick-and-mortar stores, used game trade-ins and high margin electronics sales were seen as inconvenient in an age when people stream games directly onto their devices or purchase digital copies directly from companies like Steam or Origin. Furlong managed to convince his board of his plan and turn around the company. In an unprecedented move, he cut costs in order to increase profitability and boost bottom line figures, firing top executives while hiring new talent with expertise in e-commerce. As a result of its efforts, the company managed to reduce losses significantly and boost its EPS ratings significantly; however, losses still persisted this year and are projected to continue through 2024. Investors have seen GME stock decline significantly since June when it reached an all-time high, partly attributed to unsustainable bullish sentiment created by internet traders on Reddit - such as groups such as r/WallStreetBets encouraging fellow members to "stay the course" while secretly offloading positions at once. As a result, a significant number of individuals purchased GameStop stock with little knowledge about its business or cash flows; when combined with short squeezes that tend to drive prices higher, making it relatively simple for many individuals to make significant amounts on GameStop shares. Unfortunately this behavior runs counter to traditional views of market efficiency where assets' prices should reflect all relevant information on future value and cash flows in real time. The Impact on Employees Matt Furlong's departure has come as a significant blow to GameStop employees. According to reports and LinkedIn posts from former employees, GameStop has recently undergone layoffs which are having an especially profound impact on its cryptocurrency team. GameStop's layoffs have also forced it to close underperforming stores. The company plans on decreasing its total store count from around 5,700 to roughly 4,500; and selling more pre-orders and prepaid cards as it aims to drive higher sales figures. GameStop's struggles stem primarily from its over-reliance on brick-and-mortar retailing and an inability to adapt to digital gaming trends. E-commerce and streaming services have affected GameStop's business model negatively, leading to declining sales as sales fail to adjust accordingly. To meet these challenges, the company has been making substantial alterations in its strategy and store layouts. In July 2019, they unveiled plans to focus on competitive gaming and "retrogaming", or modern versions of classic titles from previous decades. They also placed significant importance on selling merchandise related to popular video game franchises. However, GameStop's moves have not been enough to stem its share declines. Investors remain doubtful that it can turn itself around, sending GameStop stock plummeting by nearly 20% during extended trading on Wednesday. Ryan Cohen, co-founder of Chewy and recently appointed as GameStop's new CEO, failed to win over investors, who doubted that he could turn around GameStop's fortunes. Employees also remain skeptical that the company can turn its fortunes around, with one telling Polygon the company shows "sheer desperation" when trying to increase sales while failing to address decrease in foot traffic due to online video games such as Fortnite. GameStop's efforts at turning around will be fascinating to observe and witness, especially since their meme-stock golden age in 2021 seemed so bright and hopeful. The Impact on Analysts After GameStop announced it would replace former CEO Matt Furlong with Ryan Cohen, investors have demanded information about this change. Unfortunately, not everyone believes that Cohen will make an impactful difference. GameStop faces unique obstacles which could limit its return to profitability in the short term. GameStop's SG&A expenses have averaged $400 million each quarter this year, leaving little or no cash reserves remaining - GameStop burnt through over half a billion in cash due to these ongoing losses in 2022 alone! GameStop has taken steps to offset these losses by decreasing its inventory of popular consoles and cutting revenue and earnings per share by significantly. As a result, this year it is projected that GameStop will lose $268 million on sales of $6.5 billion. GameStop remains strong despite these challenging trends thanks to a loyal base of retail shareholders who are willing to ride out difficult periods and wait out any sell-offs seen among growth stocks like Tesla (TSLA) - Get Free Report, Meta (META), and Nvidia (NVDA) last year. GameStop may benefit from its solid shareholder base, and short sellers who bet against its survival. Both factors make GameStop shares more likely to recover this year than other growth stocks. These shorts currently account for more than 20% of a company's float and have made up more than 20% of their shareholding in order to force a price decline. In order to do this, they need shares of the company to borrow them from brokerages before selling them at a profit. Unfortunately, GameStop shareholder-held shares that are being short sold do not fall into the custody of a brokerage and therefore cannot be loaned out for short selling activities.