Don't Buy GameStop Stock Until This Happens

GameStop (NYSE: GME) has undergone a remarkable transformation, thanks in large part to its moment in the sun as a red-hot meme stock. While the company's share price has pulled back substantially from its lifetime high of nearly $87 per split-adjusted share reached in January 2021, the stock's explosive valuation gains paved the way for the company to undertake a dramatic financial repositioning.

In response to soaring gains for its share price driven by short squeezes and meme-stock momentum, GameStop moved to sell new shares in order to raise funds. While the stock sales had a dilutive impact for shareholders, they had a transformative impact on the retailer's balance sheet. The share offerings allowed the company to pay down its debt and build a massive cash position.

Image source: Getty Images.

The company closed out its last fiscal year, which ended Jan. 31, with roughly $9 billion in cash and equivalents. Meanwhile, the company has a market capitalization of roughly $11.5 billion as of this writing on April 22. Despite the very strong cash position, investors may want to hold off on buying GameStop stock right now.

What's next for GameStop?

With a huge cash position relative to its market capitalization, GameStop is no longer the dangerously speculative stock that it was at the height of its meme-stock phase. CEO Ryan Cohen has a big cash balance to work with, and the company is broadly expected to make a major acquisition in a retail-related space. While GameStop's highly anticipated acquisition move has the potential to be accretive for shareholders, looking for big gains on a pending purchase could be more akin to gambling than investing.

As it currently stands, GameStop's core operations revolve around its namesake gaming retail business. Unfortunately, the performance outlook for this business isn't promising.

GameStop's revenue declined roughly 14% year over year in the fourth quarter of the company's last fiscal year, which ended Jan. 31. While earnings per share rose 63% year over year to come in at $0.49, the gains were driven by cost-cutting measures taken by the company and contributions from its investments.

With digital distribution continuing to eat into physical retail sales of games and mobile, PC, and combination handhelds such as Valve's Steam Deck seemingly continuing to eat into demand for traditional console and handheld platforms, GameStop's gaming retail business will likely continue to face long-term pressures. While the company's collectibles business has delivered periods of strong growth, performance has also been uneven -- and it's unlikely the category can offset headwinds facing the gaming retail segment.

With those dynamics in mind, the next major phase for GameStop is likely tied to which company or companies they choose to acquire. The company's massive cash pile needs to be put to good use, and a smart buyout could be the game changer GameStop investors are craving. Cohen has said in interviews that his company is looking at acquiring a consumer-goods company that is both significantly larger than GameStop and undervalued.

While the eventual announcement of an acquisition could create bullish momentum for GameStop, expectations are high -- and a poorly received buyout could also result in significant sell-offs for the stock. That's why I can't recommend GameStop stock until Cohen makes it clear what he wants to buy.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.