Summary GameStop Corp. is reiterated as a buy following Q3 results and a post-earnings dip, offering a contrarian rebound opportunity amid 2025 market volatility. GME's U.S. sales grew 12% y/y, outperforming key competitors and demonstrating resilience despite macro headwinds and divestiture of underperforming international segments. The collectibles division surged 50% y/y to $256.1 million, driving a favorable shift in sales mix and boosting GAAP gross margins to 33.3%. Adjusted EBITDA margin improved to 7.8%, and YTD free cash flow reached $410 million, reflecting operational efficiency post-Canada exit. As we look to wrap up a very volatile 2025, I'm preparing for a downside in the stock market next year, which is encouraging me to look for more contrarian rebound investments to put in my portfolio in place of large-cap growth stocks. GameStop Corp. ( GME ) is looking increasingly appealing. Undoubtedly, GameStop's fall this year is tied to waning enthusiasm for Bitcoin (BTC-USD), into which GameStop has made a significant balance sheet/treasury investment. Yet we shouldn't let this smaller issue distract us from the real improvements in GameStop's core business as a specialty retailer, which is showing U.S. sales growth despite macro headwinds. Data by YCharts I last wrote a Buy article on GameStop in October, when the stock was trading around $23 per share. GameStop just released fresh Q3 results that showcased continued growth in the company's collectibles division, alongside substantial gains in adjusted EBITDA and operating margins amid the company's exit from unprofitable markets. I'm reiterating my Buy rating here, and think the post-earnings dip is a terrific time to buy into this stock at a modest price. Healthy sales trends and improving margins post-Canada exit Let's first address the positive signals coming from GameStop's latest earnings release . GameStop's revenue in Q3 declined -5% y/y to $821 million. GameStop Q3 results by market (GameStop Q3 earnings release) This decelerated versus 22% y/y sales growth in Q2, but we note one important factor: in May of this year, the company divested of its entire Canada segment, with an individual entrepreneur buying out all of GameStop's Canada stores and rebranding it as "EB Games." We note as well that alongside the Canada sale, the company in February 2025 also approved the sale of its France stores , which is driving the y/y declines in Europe. As such, the company faces a tough comp in Q3, which is its first quarter operating without the Canadian arm. And yet, we note that with the Canada segment operating at a negative -7% operating margin last quarter (its worst-performing market in terms of profitability), this sale has brought greater bottom line efficiency. Meanwhile, sales in the U.S. grew 12% y/y, which is a healthy indicator amid a more challenging macroeconomy. We note that Best Buy ( BBY ), which is one of GameStop's core rivals in gaming and electronics, reported just 2.4% U.S. comp sales growth in the same quarter (though it primarily faced headwinds from poorer-performing appliances, while entertainment sales grew double digits). Still, we find it reassuring that GameStop isn't afraid to shed off non-core, underperforming country segments and return its focus to a profitable, growing U.S. market. We note as well that the collectibles division is driving substantial growth for GameStop. Collectibles sales of $256.1 million grew 50% y/y to $256.1 million in revenue, or 31% of overall sales (inclusive of the tough prior-year comps in France and Canada). GameStop sales by product (GameStop Q3 earnings release) The shift in sales mix away from lower-margin hardware has helped GameStop boost its GAAP gross margins to 33.3% in Q3, from 29.9% in the year-ago quarter. Eliminating the burden of OPEX in Canada has also substantially helped overall profitability. As shown in the chart below, adjusted EBITDA jumped to a $64.4 million profit, or a 7.8% adjusted EBITDA margin, nine points improved from a -1.3% loss in the year-ago quarter. We note that the company's adjusted EBITDA this quarter adds back asset impairments, which represent the accounting loss from divesting the company's underperforming Canada and France segments. GameStop adjusted EBITDA (GameStop Q3 earnings release) Similarly, we note that YTD free cash flow of $410 million has returned to substantial profit, versus a -$29 million cash burn in the year-ago period: GameStop FCF (GameStop Q3 earnings release) Bitcoin losses So with these metrics—improving gross and operating margins, expanding cash flow, and double-digit U.S. sales growth despite a chillier macro environment—it's difficult to argue that GameStop's core business is thriving. That said, it's difficult to ignore the distraction that Bitcoin poses for GameStop investors, so we'll address that here. In the company's latest 10-Q filing , the company disclosed that it's holding 4,710 BTC, unchanged from the previous quarter. GameStop Bitcoin holdings (GameStop Q3 10-Q filing) The assets are marked to market each quarter, and on GameStop's latest balance sheet (shown below), these Bitcoin holdings are valued at $519.4 million, listed under its digital asset holdings. GameStop balance sheet (GameStop Q3 earnings release) This suggests that the market value for GameStop's Bitcoin holdings is around $110,270 (indeed where Bitcoin was trading at the beginning of November). Bitcoin prices have been extremely volatile over the past few weeks, and at the time of writing, BTC is hovering around $92,500. This means that there's ~$84 million of mark-to-market losses that haven't flowed through to the balance sheet yet. But in my view, focusing on these losses is a mistake. GameStop earned a roughly equivalent amount of adjusted EBITDA from operations. Moreover, Bitcoin holdings are just a small slice of GameStop's massive balance sheet, which has $8.83 billion in cash (offset against $4.16 billion in debt, which translates to $4.67 billion in net cash, or nearly ~10x the company's value of Bitcoin holdings). Valuation, risks, and key takeaways Now, we continue to remind investors that valuation is tricky for GameStop, given the moving parts on its balance sheet plus the lack of any Wall Street coverage and consensus estimates on the stock. Also, GameStop provides far less information than most companies, only issuing a press release with limited details in each quarter, without adding context via an earnings call or providing an outlook. Nevertheless, especially after the recent downside, I continue to see potential upside in the stock's multiples. At current post-earnings share prices near $22, GameStop trades at a $9.83 billion market cap. Netting off the $4.67 billion in aforementioned net cash, plus 4,710 BTC valued at current ~$92.5k market prices ($436 million in current Bitcoin value), gives us an enterprise value of $4.72 billion. Let's take Q3 - the company's first quarter excluding Canada and France - as a proxy for the company's profit potential after its reorganization and slimming down of international operations. In FY24, Q3 represented 16.3% of full-year sales (revenue grew by ~50% sequentially into Q4, the holiday quarter) across all geographies - unfortunately we can't exclude Canada or France here, since the company didn't report geo-level breakouts for each quarter last year. If similar seasonality holds throughout the next 12 months, GameStop's annual revenue would be ~$5.04 billion (down compared to $5.27 billion in FY24 and $5.93 billion in FY23, thanks to the company's elimination of markets). A 7.8% adjusted EBITDA margin against this revenue profile would imply ~$393 million in annual adjusted EBITDA. This would translate to a multiple of 12.0x EV/EBITDA. Of course, there are risks to the bull thesis here and to these projections. GameStop's sales growth right now is being held up by strong collectibles results, as well as by the recent release of the Nintendo Switch 2, which was long awaited after the initial 2017 release of the first generation of Nintendo's hit handheld console. Needless to say, trading cards are subject to fad cycles, and fervor could die down (especially as there may be a "halo effect" on Pokemon cards right now after the release of the new, highly anticipated Pokemon Z-A Legends title on Switch 2). Also, GameStop has had a choppy profitability history in the past, with adjusted EBITDA negative in the COVID years. We'll have to monitor closely to confirm that the company's current margin levels can be sustained. In the absence of guidance from the company or any helpful management commentary, GameStop is a bit of a wild card and a shot in the dark. That said, we like the fact that U.S. sales are growing and that balance sheet cash (plus Bitcoin holdings) represents a huge chunk of the company's outstanding market value. Take advantage of the dip as a buying opportunity.
