Summary GameStop is embracing unconventional moves to stay afloat, including adopting Bitcoin as a treasury reserve asset and issuing $1.3 billion in Convertible Senior Notes, despite its declining core business. Under CEO Ryan Cohen, GameStop has shifted focus from growth in its brick-and-mortar retail business to improving profitability through cost optimization. GameStop has capitalized on meme stock hype by issuing equity, raising over $5 billion in the past five years, and using that capital to pay down debt and stay afloat,. GameStop’s recent offering in convertible bonds offers a low-interest method to raise capital, but bondholder conversions could lead to significant stock dilution and volatility. Despite skepticism about its fundamentals, GameStop's strategic shifts, including Bitcoin acquisitions, may sustain hype and growth. GameStop ( GME ) is in the spotlight again after announcing, along with its unimpressive quarterly earnings results, initiatives to adopt Bitcoin as a treasury reserve asset, as well as a private offering of $1.3 billion of Convertible Senior Notes. Data by YCharts As I described in my previous article on the video game retailer, GameStop is a cash-rich company with minimal debt but operates a declining business that is losing sales every quarter. “The video game retailer has had its 'meme stock' nuances back (last) year, with the return of 'Roaring Kitty,' in which it managed to secure a super infusion of cash to its balance sheet and has surprisingly managed to hold its share price at a very high level ever since, with momentum not going away.” Of course, from a long-term business fundamentals perspective, GameStop stock still deserves a lot of skepticism, especially with its wildly unrealistic valuations. But recent moves from the management team reinforce with greater clarity at least a new outlook for GameStop moving forward and not necessarily bearish, in my view. Albeit in an unconventional way. In this article, I’m going to explain why GameStop’s approach under Ryan Cohen feels like a mix of cleverness, arrogance, boldness, and maybe even a bit of genius. GameStop Throws in the Towel on Core Business With each passing quarter, it becomes increasingly clear that the GameStop management team has given up on any initiative to re-ignite growth in its business focused on brick-and-mortar stores. Since Ryan Cohen took the helm as CEO, he has been laser-focused on improving the company's profitability at all costs. But in the retail space, the way to improve margins is usually by (1) either reducing prices or (2) cutting costs. Even though the management team offers very little clarity on its initiatives (GameStop has never held an earnings call since Ryan Cohen took over the company), at least it is quite clear from GameStop's filings the three strategies of its core business: (1) Establish omnichannel retail excellence —in other words, maintain a minimum standard of quality and delivery of the business; (2) Expand its addressable market —basically to invest in higher margin segments such as collectibles to make up the last and; (3) Achieve profitability —where according to the company will be achieved mainly by optimizing the costs of its structure seeking efficiency. Therefore, it is very clear that GameStop's objective is for its core business not to be a burden to the company's cash generation and that there is no interest in investing a vast amount of cash on its balance sheet in any attempt to revamp growth. In my opinion, that's a pretty smart strategy. I think it's much better to admit that the core business has no future and try to optimize it as much as possible than to keep deploying capital to something with uncertain returns. Many look at GameStop's income statement and see the company's declining revenues as alarming (something deadly for a brick-and-mortar retailer). But in GameStop's case, operating at breakeven is what matters now, and decaying sales don't seem to be bothering the management team, who presumably have other better plans to sustain the company's business on a consistent basis. Data by YCharts Ryan Cohen's GamePlan: Capitalizing on Hype I highly doubt that Ryan Cohen had any preemptive move that would have had the effect on GameStop of becoming a meme over the last five years, but more specifically between 2020 and 2021. However, I assume that Mr. Cohen realized after being involved with GameStop over these past few years that the easiest way to make GameStop a $10+ billion market cap company isn't through its core business but rather with the hype surrounding the stock. And this is quite a clever strategy on his part, in my opinion. Ryan Cohen and his team managed to skillfully capitalize (by selling equity) on retail investors inflating the stock price based on multiple reasons beyond the fundamentals. These moves allowed the company to pivot from a decaying brick-and-mortar retailer headed for imminent bankruptcy to raise more than $5.1 billion in cash in five years and pay off practically its entire debt load. A big parenthesis is that, as we see in the table below, management coldly endured massive share price losses between 2022 and 2023 without issuing any additional equity, until the re-appearance of Roaring Kitty in 2024 to re-ignite GME's rally and then, yes, selling a ton of stock. Seeking Alpha The big issue, in my opinion, is that it seems to me that Ryan Cohen and his management team may have become addicted to this strategy of diluting stock as a method of recurring funding for the company since its core business should only shrink to zero if it continues at the same rate (even if it takes several more years). That said, let's have a look at the latest update from GameStop's management: [GameStop] announced the pricing of $1.3 billion aggregate principal amount of 0.00% Convertible Senior Notes due 2030. To be clear, convertible bonds are like debt that companies issue to raise money. In this case, GameStop will be lending $1.3 billion to investors, but instead of paying them interest like any other regular bond, the company is offering the option for these investors to convert their bonds into GameStop shares at a later time. All of this would make sense for bondholders in case GameStop's stock price rises significantly in the future, whereupon the bonds could be converted into shares. The initial conversion rate is 33.4970 shares per $1,000 of bonds, which gives an initial conversion price of around $29.85 per share. In other words, GameStop stock needs to be well above $29.85 for bondholders to convert their bonds and make a profit on it. It's important to note that there are no traditional lock-up periods, meaning that GameStop's bondholders can convert their bonds whenever they want. However, there are some terms, such as GameStop's right to redeem the notes almost two years before maturity (2030) if certain conditions are met (e.g., stock price reaching 130% of the conversion price for at least 20 trading days). But perhaps one of the most important points is that as bondholders convert their bonds into shares, this means more shares in circulation, or in other words: dilution. It's quite likely that if there's a new rally in GameStop stock, a lot of bondholders will decide to convert their bonds into shares, which will generate dilution and potentially dampen the rally, forming a cycle of high volatility. But this clearly seems to be a risk that Ryan Cohen doesn't seem to care about. The big point, therefore, is that GameStop will be able, by issuing these Convertible Senior Notes, to raise a significant amount of capital without the immediate burden of paying interest (a major benefit compared to traditional bonds) which helps improve cash flow and flexibility for business investments. GameStop Goes Crypto The second most recent announcement by GameStop's management, and perhaps the most important piece of news, is precisely the fact that the company has decided to invest in Bitcoin as a treasury reserve asset. Recall that in March last year, GameStop declared that its board of directors had approved a new investment policy that ensures that its CEO Ryan Cohen has the authority to invest in equity securities and other financial instruments. Previously, the company only invested its cash balance in fixed assets, other than its own operations. Mr. Cohen directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Depending on certain market conditions and various risk factors, Mr. Cohen, in his personal capacity or through affiliated investment vehicles, may at times invest in the same companies in which the Company invests," the filing said. To be honest, the timing for GameStop to disclose its decision to adopt Bitcoin as a reserve asset wasn't the best, given that it missed the massive cryptocurrency bull run in 2024, where it now trades at more moderate levels versus last year's euphoria. But its rather obvious decision to mirror Michael Saylor's (Micro)Strategy's ( MSTR ) steps again looks like a big bet to take a shortcut to grow its capital despite its decaying core business. Okay, in MicroStrategy's case, the strategy has worked very well. Just look at how the company has gone from $1.4 billion in 2020 market cap to nearly $80 billion today—solely pushed by its Bitcoin acquiring strategy and also sustaining a weak core business. Now, from one point of view, the GameStop of today is in a similar stage as (Micro)Strategy was in 2020 in terms of funding to endorse a Bitcoin acquisition strategy and issuing convertible bonds for its cryptocurrency purchases. This can, arguably, be a new consistent stage in GameStop's story, beyond just being a video game retailer. Ryan Cohen Is Still Sparking More Hype GameStop’s CEO, Ryan Cohen, is called "the meme king" for a reason. Recently, GameStop changed its entire investor relations page to an extremely simple layout but practically identical to that of Berkshire Hathaway ( BRK.A ). Company's IR It should be noted that over the last two years, Ryan Cohen has commented on X that he is a mixture of Warren Buffett and Carl Icahn, where he seeks investments in discounted companies (often overlooked by the market) and is also an activist investor, just like Icahn. X With GameStop's investment policy being changed to give Ryan Cohen full power, speculation is rife that he could turn the video game retailer into a kind of holding company—just as Warren Buffett turned Berkshire Hathaway, initially a textile company, into the world's largest holding company conglomerate. Knowing about these coincidences, Ryan Cohen is stoking the fire to keep the hype around GameStop and its loyal retail investors going strong. Risks GameStop today, after recent declines, has a little less than $10 billion in market cap. The only way I see for the company to justify its equity value based on its fundamentals the way it is is if it can report at least double its cash balance. Otherwise, valuations are completely out of reality. Data by YCharts While this is not unrealistic, given all the unprecedented events that have occurred with the stock in the last five years at least, there is at least a long road in terms of raising capital with convertible bonds, and buying and selling Bitcoin as a source of extra income for the company. To be clear, I don't believe there will be a lack of demand for the coverable bonds that GameStop will issue. However, the big problem in my view is the lack of vision of how shareholders will react with the company having to dilute shareholders more often with this strategy being applied regularly (which is something I assume will be GameStop's new normal). The Bottom Line In my opinion, GameStop's strategy towards crypto and capitalizing on the stock's "meme" hype on convertible bonds is clever, given the way the markets have behaved over the past five years at least. Although there are numerous reasons, many of which I agree with, that make any bullish call on GameStop unreasonable (to say the least), I am still extremely uncomfortable betting against the company for the respective reasons: (1) The stock remains held by mostly retail investors not by fundamentals but mainly for hype; (2) Short sellers have been burned countless times quite badly; (3) The company is nowhere near bankruptcy and has a massive amount of cash on its balance sheet; (4) The management team is unclear in its decisions, and lack of clarity also creates an unpredictable and potentially risky scenario for any bet against the stock; and (5) GameStop using its capital to buy Bitcoin is something that can work out very well, and (Micro)Strategy is proof of that. That said, I'm sticking with a Hold rating on GameStop, thinking that this stock is still an interesting stock to follow on the sidelines, but too risky to take any bullish or bearish stance.