Cohen’s GameStop Play

In 2020, Chewy cofounder Ryan Cohen acquired a 12.9% stake in GameStop. His investment bore fruit when shares of the video game maker climbed as high as 145% in 2021.

Last year, Redditors had taken it upon themselves to save GameStop from the impending doom predicted by Wall Street’s financial experts. The company was set to spiral downward before Cohen stepped in, in 2020, and started buying up shares while lambasting management for their lack of vision and motivation in engineering a success story.

However, Cohen doesn’t seem to be interested in short term gains. Instead, he utilized his affluence as a member of RC Ventures to petition the board of GameStop to develop a long-term strategy that will turn the flailing company into a specialized e-commerce retailer of gaming products. He was later offered three seats on the board of the directors, including one for himself. In June 2021, he was elected as GameStop’s board chairman.

Cohen had applied a similar strategy for Chewy. After the company was initially bought by PetSmart for $3.5 billion in May 2017, Ryan and co-founder Michael Day transformed the e-commerce pet products retailer. In March 2021, they reported a net sales of $7.15 billion for the fiscal year.

A Fresh Batch of GameStop

On March 23, Cohen posted on Twitter, “I put my money where my mouth is.” The tweet quickly amassed over 33,000 likes and garnered over 6000 retweets.

Cohen now owns 11.9% of GameStop, which translates to 9,101,000 shares. The recent filing revealed that Ryan Cohen’s RC Ventures LLC paid between $96.81 to $108.82 per share.  

News of Cohen’s acquisition sent GameStop share prices careening upwards and stock closed at $123.14, up by 31% on Tuesday. Last year, the video game retailer’s shares had peaked at $350 per share as rookie investors and traders joined in to “teach Wall Street a lesson.” As of Tuesday, Cohen’s shares have a valuation of over $1.1 billion.

The stock surge has helped the brick-and-mortar retailer to recover losses after its poor performance last week. The firm reported a fourth-quarter loss of $147.5 million which had an adverse effect on GameStock shares.

GameStop’s Fiscal Growth

Last week, GameStop posted its results for the fourth quarter and fiscal year ended January 2022. The company reported net sales of $6.011 billion for the fiscal year, an improvement from the $5.090 billion for fiscal year 2020.

During the earnings call, CEO Matt Furlong admitted that, “Net sales were $2.25 billion for the quarter compared to $2.12 billion in the fourth quarter of 2020 and $2.19 billion in the fourth quarter of 2019. This was the first quarter in which our growth topped pre-pandemic levels.”

He also acknowledged that they have $915 million in inventory compared to $602.5 million at the close of fiscal year 2020.

On March 17, GameStop’s shares took a hit and closed at $87.70 at the end of trading hours. This gave rise to concerns that the company is not doing enough to overturn its fortunes. Meanwhile, Furlong admitted that they have plans to enter the NFT marketplace by the second quarter.

On the other hand, two weeks earlier, Ryan Cohen revealed that his firm RC Ventures LLC owns a 9.8% stake in Bed, Bath & Beyond . Shares for the home products retailer surged after this news became public. He also wrote a letter to the board calling out the company’s performance and mentioning that it is “struggling to reverse sustained market share losses, stem years-long share price declines and navigate supply chain volatility.”

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Moreover, according to a Wall Street Journal report, eight of its incumbent board members are to retire after the June annual general body meeting, as reported in their securities listing.

The planned exits include Reggie Fils-Aimé, who was appointed to the board last March and who had previously become a gaming industry celebrity as the long-time president of Nintendo’s American division. Kathy Vrabeck, a former executive at Activision. Her plan to exit was announced in January. The others are Lizabeth Dunn, Paul Evans, Raul J. Fernandez, William Simon, James K. Symancyk and Carrie W. Teffner. This means now the company will have very few gaming experts on board.

“Turnover among our Board may disrupt our operations, our strategic focus or our ability to drive stockholder value,” reads the filing. “If we fail to attract and retain new skilled personnel for our Board, our business and growth prospects could disrupt our operations and have a material adverse effect on our operations and business.”

Their exit affirms that Chewy co-founder Ryan Cohen, will chart the company’s new future. Cohen has been calling for a company shake-up since late last year, pushing for a shift to digital sales. He bought a 12.9% stake in the company in 2020 through his investment firm RC Ventures. He has brought about some major changes in the company with some new C-suite hires and now some fires.

Earlier, GameStop announced that Cohen would chair a “strategic planning and capital allocation committee” to figure out the company’s future. None of the eight departing board members were on it.

The board members left now are Cohen, his former Chewy colleagues Jim Grube and Alan Attal, activist investor Kurt Wolf, and current CEO George Sherman.

It was reported earlier that Jim Bell, the CFO, was pushed to resign from his position. Soon after, CCO Frank Hamlin too resigned.

Cohen has been openly critical of Sherman and his top executives’ handling of Gamestop. In an open letter to the board he wrote, Sherman, “appears committed to a twentieth-century focus on physical stores and walk-in sales, despite the transition to an always-on digital world,” Cohen said. He added that the board lacks “the type of strategic vision” necessary for GameStop, “to pivot toward becoming a technology-driven business that excels in the gaming and digital experience worlds.”

In his letter, Cohen said the company “needs to evolve into a technology company that delights gamers and delivers exceptional digital experiences – not remain a video game retailer that overprioritizes its brick-and-mortar footprint and stumbles around the online ecosystem.”

Since Cohen joined the board in January, he has made a string of high-profile hires, including former Amazon Web Services engineering lead Matt Francis as the company’s new chief technology officer. Former Amazon fulfillment director Jenna Owens of Amazon will now be the company’s new chief of operations.

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The company’s market capitalization gained roughly $200 billion between November 17 and December 21. Tesla stock was $650 when it went into the S&P 500. Since its addition, Tesla stock has traded as high as $900 a share and as low as $614.

GameStop’s market cap is about $9 billion. Compared to Tesla, the money involved is much less; hence, the stock’s movement might be more frantic.

Roughly 35% of GameStop stock worth $3 billion was traded on Friday. Tesla stock has swung about 4% on about $9 billion in shares exchanging hands.

GameStop shares are trading above their level, fuelled by the social media-fed frenzy that led to a massive short squeeze. Shares traded as high as $483 in January.

GameStop share pullback could be a painful lesson

The rise in GameStop shares is bound to hurt many small-cap active portfolio managers who benchmark their performance against the Russell 2000 small-cap index. And most such managers carry underweight GameStop shares. That means they own less GameStop shares than those represented on the Russell index. As a result, they underperformed passive indexes that seek only to match the benchmark as GameStop shares soared.

Investors noted that money flowing to micro-cap stocks can create outsized moves because they have relatively few shares available to be traded. Micro-cap stocks have an average free float of about 29 million shares compared with an average of about 600 million shares for S&P 500 stocks, according to Refinitiv data.

“Micro caps are particularly unpredictable,” said Joel Schneider, deputy head of portfolio management at Dimensional, “but they do go through periods of very strong performance.”

Active managers got some of that underperformance back in February. The gaming shares traded as low as $39 a share this month before bouncing back in recent days. “Volatility picked up again, but this time not driven by a short squeeze…. This volatility is a growing risk to small-cap active managers,” wrote Wells Fargo analyst Christopher Harvey in a Friday note. “Longer term, there is a growing fear of locking in stock-specific underperformance if a high-flyer reversion does not occur before June’s Russell re-balance.”

The Russell Microcap Index, whose components have a median market value of about $350 million, has climbed 26% nearly two months into 2021.

The problem for small-cap managers is that GameStop might graduate out of Russell 2000 and into the big game stocks of Russell 1000 and S&P Index, putting the small cap managers into trouble.

Managers trying to recapture performance before reconstitution could be driving the stock. That means there will be again some frantic trading before the reconstitution of the Russell index.

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