Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

GameStop’s Earnings Show Strength, But Its Stock Still Detached From Reality  

Published 11/06/2021, 06:07 pm
Updated 02/09/2020, 04:05 pm

GameStop Corp (NYSE:GME), the video game retailer favored by the Reddit crowd, is showing investors that its business has momentum while it implements its turnaround plan.

In its earnings report released on Wednesday, the brick-and-mortar electronics vendor reported better-than-expected results and posted its first quarterly sales growth in three years. For the quarter ending May 1, it had revenue of $1.28 billion, up 25% from the prior year. While the company declined to give future guidance, GameStop said sales in May rose about 27% from a year earlier.

The company has also been able to boost its cash reserves and reduce its debt, due to selling nearly $552 million of its shares during the quarter. It intends to file papers to sell up to 5 million shares, after selling 3.5 million shares in April.

As the company’s gaming console sales rebound, the Texas-based company is also moving swiftly on its plan to turn itself from being a retailer into an e-commerce powerhouse. Ryan Cohen, an activist investor who became GameStop chairman after building a 13% stake, told investors on Wednesday that he won’t disappoint them.

“We are trying to do something that nobody in the retail space has ever done,” said Cohen, who is also a co-founder of Chewy (NYSE:CHWY), at the company’s annual meeting. “But we believe we’re putting the right pieces in place and we have clear goals: delighting customers and driving shareholder value for the long term.”

Though investors know little about his actual strategy to turnaround GameStop business, his recent hirings show he is moving away from the bricks-and-mortar model.

The newly appointed CEO Matt Furlong has led Amazon.com's Australia business, while CFO Mike Recupero worked at a similar role at Amazon’s North American consumer business. These top changes follow Cohen’s earlier overhaul of GameStop’s management that added about a dozen senior executives with similar digital-focused backgrounds.

1,500% Rally

These steps are certainly impressive but they still don’t justify a 1,500% rally in GameStop shares this year. GameStop has been one of this year’s top meme stocks, riding on a social-media buzz rather than business fundamentals. The stock closed Thursday at $220.39, down 27.6% on the day.

GameStop Weekly Chart.

Baird analyst Colin Sebastian reiterated his neutral rating on the stock after the earnings report, saying the turnaround plan lacks details.

“As GameStop’s board continues to shuffle the management deck, the goal to transform into a ‘technology’ company that delights gamers remains mostly a mystery, particularly as the video game industry accelerates the shift toward downloads, streaming and cloud services,” the note said. 

Baird, who has a price target of $25 per share for GameStop, further added:

“No doubt the console transition period is providing a lifeline, but games are not dog food, and investors deserve more than memes to value a company’s fundamental, long-term prospects.”

Another piece of evidence that shows that institutional investors find GameStop shares too detached from its fundamentals came from a Bloomberg report that said fewer Wall Street analysts are now covering the stock than last year.

The video-game retailer is currently covered by four analysts, down from nine analysts at the beginning of the year. As of Wednesday, GameStop has two hold and two sell ratings, according to data compiled by Bloomberg.

Bottom Line

GameStop business and its turnaround are showing some progress after a buying frenzy by the social media-inspired investors. But that progress isn’t enough to attract serious money managers who still don’t see its shares’ meteoric rise this year supported by fundamentals.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.