The 10% drop in GameStop (NYSE:GME) shares during Thursday’s session should tell you everything you need to know about their Q3 earnings report, which was released on Wednesday night.
A healthy beat on the video game store’s topline revenue couldn’t mask what was by any measure a dirty miss on their bottom line EPS. The steeper-than-expected loss was quite steep. Against an analyst expectation of -$0.58, the final print was almost three times as bad at -$1.39.
There were some promising updates on the quarter, such as the opening of new offices in Seattle, Washington, and Boston, as well as a fresh $500 million ABL facility which closed last month.
They also managed to end the quarter with more than $1.4 billion in cash and cash equivalents, which is a substantial war chest to be able to work from as management continues trying to build momentum.
This latest report will make for a sore topic of conversation at the company holiday party, as the performance from recent quarters had suggested the business was on track to move closer to profitability, rather than further away from it.
Long Term Growth Concerns
Another key metric to note was total inventory which topped $1.1 billion, a significant jump on the $861 million they counted for the same quarter last year, but management was quick to dispel any concerns around this. They made a point of saying that they decided to “front-load investments in inventory this year in order to make sure it was ready for holiday demand and supply chain issues.”
However, comments from GameStop’s CEO, Matt Furlong, didn’t do much to impress the team over in Wedbush. Furlong had said with the release that “our focus on the long term means we will continuously prioritize growth and market leadership over short-term margins." But in response to the disappointing report and these comments, Wedbush cut their price target on GameStop stock to $45 from $50, and raised concerns over the viability of the company’s long-term strategy.
In addition to revealing a widening loss, GameStop also disclosed that the SEC issued them with a subpoena back in late August, reportedly asking for additional documents related to an investigation launched earlier this year regarding the trading activity of the company.
"We are in the process of producing the documents and have been and intend to continue cooperating fully with the SEC Staff regarding this matter. This inquiry is not expected to adversely impact us," the company said in its filing. Though not a massive issue just yet, it’s a fresh headache that investors probably didn’t need on top of an earnings miss.
Sizing Up The Opportunity
The stock is down close to 40% now since the back end of November, and is starting to test the one key line of technical support it has around the $150 mark. GameStop has performed a lot better than most expected in the wake of its short squeeze rally at the start of the year, but if it were to give up the $150 level, then it’s very easy to see shares drifting back towards double-digit prices. The stock’s RSI is still in the mid-30s and so couldn’t quite be called oversold just yet, while a bearish crossover in the MACD two weeks ago is continuing to haunt shares.
The bulls will point to the fact that the company’s sales are not only growing at a decent pace, but also faster than expected, and this kind of pace can often help Wall Street to overlook a lack of profitability.
But if GameStop managed to buy itself a couple of months’ grace following the 3,000% rally in January, it’s going to need to start proving it’s heading in the right direction for long-term success. Based on this week’s report, they’re not quite there yet.
