Ryan Cohen's GameStop Bet Is Bigger Than Video Games

Ryan Cohen's $97 million bet

0:00 Ryan Cohen spent about $97 million of his own money on GameStop stock in just 5 weeks. On Friday, the stock closed a little above the average price he paid. When a CEO buys that much, he's either seeing something we aren't, or he's the world's most expensive cheerleader. Let's figure out which. Because what he's buying isn't really a video game store anymore. It's a pile of cash, a big stake in eBay, a trading card business, and a takeover bid that got rejected.

The insider buys

0:24 Here are the buys. The first came on September 10th. One million shares at about $20. Last came in mid-October at $27. Add up every Form 4 from that stretch, and it's about 4.1 million shares for roughly $97 million. That is not a token buy. Four other directors bought too, though one of them bought a couple of days before Cohen started. After the last buy, he owned 42.5 million shares directly, roughly 8% of the company, worth around $1 billion at Friday's price.

0:52 My name is Blake. I dig up stocks before the bull stampede, so you're not buying at the top like Wojak. And today, on 9to5investing, we're opening up GameStop's balance sheet to see what Ryan Cohen thinks he's getting for all that money.

Why his own cash matters

1:04 Quick note on why insider buys matter. On a Form 4, Code P means he bought on the open market with his own cash. It's not a stock award or an option he got for free. I have everything on the line. I have everything to gain and I have everything to lose, and there's no risk-free compensation.

Cash, eBay and debt

1:25 As of August 1st, GameStop had 5.1 billion of cash and marketable securities, plus a smaller pile of crypto. It also owned a stake in eBay worth about $4.9 billion on that date, and now holds almost 10% of the company. And after retiring about $1.4 billion of convertible bonds in September, its long-term debt was about $2.8 billion. Now, the price tag. With about 504 million shares at Friday's close, GameStop is worth around $12.2 billion. So cash plus the eBay stake minus debt comes to roughly $7 billion using August values.

1:54 That's more than half the company's price. Two important caveats. The eBay number moves with eBay's stock price, and it isn't cash until it's sold, but it's still a real asset.

A smaller, more profitable business

2:04 Now, the store itself. It's shrinking. Second quarter sales were $790 million, down from $972 million a year earlier. But the mix changed. Collectibles, things like trading cards and figures grew 57%, and are now nearly half of sales. And the profits look nothing like the old GameStop. Operating income was $160 million, its best second quarter ever, after it closed weaker stores. One accounting note for you. Net income was $299 million, but management's adjusted number, which strips out items it doesn't count as running the business, was $161 million.

2:33 Management also raised its full-year outlook to more than $650 million of adjusted EBITDA. Smaller store, bigger profits.

The rejected eBay bid

2:39 Now, the wild part. In May, Ryan Cohen offered to buy all of eBay for about $56 billion, $125 a share, half in cash, and half in GameStop stock. GameStop was worth about $12 billion at the time. That's a hot dog stand making an offer on the whole stadium. Like, where's the rest of the money coming from? Andrew laid it out pretty clearly. I don't understand your question. We're offering half cash, half stock, and we have the ability to issue stock in order to get the deal done.

3:10 EBay's board turned it down, calling the offer neither credible nor attractive. Ouch. Since then, reports said GameStop might settle for a partnership instead, like trading card counters in its roughly 1,600 US stores. Nothing has been announced. So part of what Cohen is buying is an option on that eBay stake. Sell it, partner with it, or try again.

What happened to the warrants

3:30 There's one more piece people asked about, the warrants. GameStop had warrants that let holders buy stock at a set price well above where it trades, and they expired on Friday. With the stock around $24, paying more than that made no sense, so most holders likely let them expire. The final count hasn't been reported yet. If any of those warrant holders bought GameStop stock above the current market price, I don't know what they were doing, and I don't think that they do either.

4:03 If they'd been worth exercising, GameStop would have issued new shares and collected cash. Instead, it probably gets neither.

The bear case

4:09 That's the bull case. Here's what negative Nelly would say. First, total sales are still falling, so collectibles have to keep growing fast just to make up for it. Second, a lot of the value depends on what Cohen does with the money. A $56 billion bid that eBay called not credible doesn't exactly calm that worry. I also could not verify a current analyst consensus for GameStop, so there's no Wall Street scoreboard to lean on here. And it's still a meme stock.

4:31 Over the past year, it's swung from under $18 to over $28 without changing what it owns.

What I would watch next

4:38 So why would Cohen spend $97 million? Here's my read. He's betting the market prices GameStop like a dying store, when more than half the price is cash and an eBay stake, and what's left is posting record profits. Peter Lynch made a famous point about this. Insiders sell for lots of reasons, but they only buy for one. They think that the price is going up. It's a rule of thumb, not a guarantee. If you're interested, watch for the next earnings report.

5:01 The final warrant count and any move on that eBay stake. Is Ryan Cohen a genius buyer here or just the world's most expensive cheerleader? Let me know in the comments below. The algorithm picked this next video for you and it costs you nothing.