The only thing we can guarantee about the GameStop Corp (NYSE:GME) market is that the wild swings in volatility are not over. While the company may be working hard on improving itself, there is still no fundamental reason to own the stock, and Wall Street’s interest is minimal.
With no analysts and no institutions supporting the name, there is no reason to think the stock can move upward in a way the market can sustain. When it comes to the analysts, there are still only 2 covering the stock and their coverage is old and bearish. Between them, they are forecasting at least 30% in downside and the low target of $30 implies a 75% market implosion.
The institutions still hold about 38.5% of the company but the net of activity is decidedly bearish. The institutions sold shares in the amount of $1.4 billion over the past year which is equal to 10% of the market cap now. The institutional activity is net-bullish so far in Q2 2022 but we don’t think that will last now the FQ1 results are in the bag. And there is the short interest to consider as well.
The Q1 results may have had some rays of light shining through the darkness but they were not enough to send the shorts running. As it is now, the short interest is still running in the mid-20% range and it could grow.
Gamestop Loss Widens, Shares Swing In Premarket Trading
Gamestop had an OK quarter in terms of revenue growth but that’s just about all the good news we can give. The $1.38 billion in net revenue is up 7.8% over last year and beat the Marketbeat.com consensus estimate but the beat is slim and the growth related to expanded and new brand relationships rather than core sales.
On a segment basis, Hardware sales fell 620 basis points as a percentage of the net while Software and Collectible sales moved higher. Our question is how will collectible sales, and sales of all gaming equipment, hold up in the face of inflation and rising interest rates?
Moving down the report, the news gets worse. The company reported a contraction in the margin at the gross and operating level with the gross margin down 420 basis points and SG&A expenses up 22%. This left the operating income down sharply from last year and the adjusted loss nearly doubled. The doubling of the adjusted loss is especially troubling in the face of a higher share count. The share count is up 15% and diluting the numbers on a loss-per-share basis.
The mitigating factor in all of this is a 60% increase in inventory versus last year but take this news with a grain of salt. Inventories are up 60% versus last year but most of the increase was made in prior quarters, the impact on the company’s Q1 results is only about 6% of the loss.
The bottom line, Gamestop has a business but it is still bleeding money while desperately trying to gain a foothold in the cryptosphere. The move toward crypto and NFTs may pay off in the end but are in “wait and see” mode on that one.
The Technical Outlook: Gamestop, Expect Volatility, And Nothing Else
Shares of Gamestop were first higher and now lower in the wake of the Q1 results and we think heading lower in the near term. There is no catalyst for higher prices in the report that we can see and every reason for short sellers to stick to their positions. In our view, price action will move lower and at least test support at the short-term moving average.
If there is no response from the bulls a move below the EMA is expected and it could be a big one. If, however, the bulls start buying at the EMA we could see some wild swings over the next few days.