With 20% Of GameStop’s Market Cap Now Composed of Its Cash Holdings, the Meme Stock Is Fast Becoming a Picture of Financial Discipline

How the tables have turned. GameStop shares were up a whopping 50 percent in early pre-market trading today, while the First Republic Bank (FRC) now threatens to crash the entire banking edifice. While it is generally not a good idea to compare stocks that are a part of fundamentally different industries, the contrast between GameStop and First Republic Bank does make for a very interesting analysis.

Yesterday, GameStop surprised investors when it reported a quarterly profit for the first time in two years. To wit, for Q4 2022, the company reported net sales of $2.23 billion and a profit of $48.2 million, corresponding to an EPS of $0.16. The company was able to post a razor-thin profit by aggressively cutting costs. For instance, GameStop recorded selling, general, and administrative (SG&A) expenses of $453.4 million for the quarter, equating to 20.4 percent of its sales. This is a marked improvement from the pertinent quarter of last year when SG&A expenses were recorded at 23.9 percent of sales.

To extract further cash savings, GameStop has been trying to revamp its real estate portfolio. On the revenue side, the company has been trying to revitalize video game sales while also betting big on NFTs via a dedicated marketplace. Nonetheless, GameStop has not managed to record any material success when it comes to tapping this new revenue source. As an illustration, sales of collectibles made up 14.1 percent of GameStop’s quarterly sales, just a tad higher than the 12.4 percent contribution in Q4 2021. It is hardly a surprise, therefore, that GameStop was not able to grow its overall net sales on an annual basis.

Despite this persistent weakness in GameStop’s top-line metric, the company has substantially improved its cash position. To wit, as of the end of Q4 2022, GameStop had $1.4 billion in cash. This equated to a whopping 26 percent of the company’s market cap, based on yesterday’s closing price. Based on today’s much more elevated stock price, GameStop’s cash balance is equal to around 20 percent of the company’s current market capitalization.

While GameStop is flying high right now, even managing to win a rare stock price target upgrade, the situation remains quite murky for First Republic Bank and its other mid-sized banking counterparts. As most of our readers would know, the current banking crisis began when regulators shut down the Silicon Valley Bank (SVB) about two weeks back.

After the financial crisis of 2008, banks were incentivized to increase their holdings of US Treasuries. As an inducement, banks were not required to report mark-to-market prices of these Treasury holdings on their balance sheet, provided that such securities were held to maturity. However, as interest rates started to increase in earnest in 2022, banks started recording substantial unrealized losses on their Treasury holdings. Remember, as interest rates increase, bond prices usually fall. Thereafter, in early March, Silvergate bank shuttered its operations owing to significant losses that the institution had racked up when FTX went under. This unleashed a bank run on mid-sized banks, including SVB. In order to meet this growing demand for cash, SVB was forced to liquidate its Treasury holdings and realize the losses on these securities that were previously off its books. This fire sale evaporated the entirety of SVB’s capital, prompting regulators to shut it down.

In the aftermath, the US Treasury authorized the FDIC to protect all deposits held at SVB and not just those that were insured. The Federal Reserve also announced a new program, dubbed the Bank Term Funding Program (BTFP). Under this program, distressed banks can post eligible collateral (Treasuries and agency securities) at par value and receive funding with maturities of up to one year. Since this program accepts collateral at par value, it would allow banks to sidestep the issue of mounting unrealized losses that result from selling high-duration securities in a rising interest rate environment.

The problem for First Republic Bank, however, arises from the fact that it does not possess substantial quantities of collateral that is eligible for the Fed’s BTFP facility. The bank has reportedly lost around $70 billion in deposits. Over the weekend, a consortium of banks agreed to deposit $30 billion at First Republic Bank. However, this is just an ad-hoc measure. To stem the growing outflow of deposits from mid-sized banks to those that are deemed “too big to fail,” the US Treasury will likely have to implement a system-wide deposit guarantee – a herculean task given the divided Congress.

First Republic Bank shares are down over 80 percent so far this year. For comparison, GameStop is now up 40 percent. Not too long ago, meme stocks were dismissed by seasoned analysts for their flimsy bullish thesis. Now, however, with GameStop presenting a picture of financial prudence and FRC crumbling under the weight of systemic risks, perhaps the time has come for a comprehensive reevaluation of what constitutes an attractive investment proposition.

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