GameStop: What to Make of Mixed Earnings Report

© Reuters. GameStop: What to Make of Mixed Earnings Report

Perhaps the most notorious of the meme stocks, video game retailer GameStop (NYSE:GME) turned in its earnings report on Wednesday.

Pressure on its primary model, increasingly poisonous public relations, and a market that seems to be investing in the company only to annoy hedge funds, combine to make me extremely bearish on GameStop overall.

GameStop was perhaps the first meme stock, a company investors flocked to as the result of social media plans to take advantage of stocks that were heavily shorted. GameStop had spent most of the last three years struggling gamely to stay in the two-digit price range.

September 2020's arrival pushed GameStop shares into the $10 range for the first time in 2020. Then January 2021 arrived, and GameStop shares blasted up on “a rocket to the moon” as some put it. GameStop set a new string of all-time highs almost daily for most of January. (See GameStop stock charts on TipRanks)

The latest news for GameStop is nothing great either. GameStop reported a net loss of $61.6 million, around $0.85 per share. That's a significant improvement over this time last year. Then, the company posted a loss of $111.3 million, which worked out to $1.71 per share.

Revenue was a different story. The company's sales improved, reaching $1.18 billion in this quarter. A year ago at this time, the company posted $942 million. Analysts, meanwhile, were looking for $1.12 billion, which put GameStop somewhat ahead of the analyst curve.

GameStop is looking to online retail to step up its operations. Already, the company has leased a 530,000-square-foot space in Reno, Nevada to serve as a fulfillment center for online orders. A customer care operation will launch in Pembroke Pines, Florida.

Wall Street's Take

Wall Street consensus analysis calls GameStop stock a Moderate Sell. Based on five analysts that have offered 12-month targets in the last three months, two offer a Hold rating, while the other three offer a Sell rating.

The average GME price target is $88.33, with a high of $190, and a low of $25. The average price target represents downside potential of 55.7%.

Too Many Avenues for Disaster

It was one thing to buy a flier on GME back in 2020, when the stock was in the single-digit range, and there was a new console generation on the horizon. It was one thing to buy in when video gaming's popularity was extremely high thanks to the pandemic keeping people indoors.

Granted, GameStop is making some sound moves. It's cutting down on its active storefronts. Once, it was possible to walk out of a GameStop, look across the parking lot, and see another GameStop operating within view of the first.

GameStop labors under several difficulties, however. There's the bizarre nature of the latest new console rollout; how many people still can't find an Xbox Series X or PlayStation 5 thanks to supply problems? Those consoles came out last November, and people are still struggling to find one.

Moreover, GameStop has serious problems with its public perception. Watching GameStop tell its employees to deliberately defy the police and stay open back in the early days of the pandemic was a bad look by any standard.

GameStop's main business model is also under fire. Sony (NYSE:SONY) revealed that digital sales outnumbered physical sales throughout the fiscal year back in its third-quarter 2020 results. What does that do to a company focused on selling used physical games?

Concluding Views

With GameStop now at the mercy of hedge funds and social media investors, there's too much emotion invested in this stock on several sides.

Melvin Capital and Point72 both suffered losses connected to GameStop stock already. Performance this year has been erratic to say the least. The fundamentals simply no longer apply to this company's share price.

While GameStop may prove to be worthwhile once again, after all the sound and fury dies down, that time is not now.

Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.

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