Meme stock mania hasn’t taken off like it did a year ago, but GameStop (GME) remains one of the most widely followed stocks on the market. Its stock has risen 27% year to date, besting the 8% rise in the S&P 500 index. Much of those gains have come over the past thirty days with shares rising some 23%.
Investors want to know whether these gains are sustainable. That question, among others, may be answered when the video game retailer reports first quarter fiscal 2023 earnings result after the closing bell Wednesday. Currently trading at around $23 per share, the stock is off some 52% from its 52-week high of around $48. Still, GME has shown some solid fundamentals, demonstrating positive cash flow and an overall strong financial standing.
The company last quarter reported a surprise profit even as it continues to struggle to grow revenue. What’s more, U.S. video game sales fell year-over-year for the second straight month in April. Overall video game sales fell 5% to $4.12 billion in April, compared to March's sales of $4.32 billion. As it stands, video game sales are down 2% on a year-to-date basis. Modest gains in console sales weren’t enough to offset a broader decline. This trend, if it continues, is likely to impact GameStop’s performance going forward.
The company is projected to generate roughly $6 billion in revenue for the fiscal year. The gross margins, currently at around 25%, will need to move much higher in order to maintain profitability. To date, the management has done a solid job cutting costs, which will need to continue if video game sales continue to decline. However, the collectibles category has been a bright spot, with revenue rising 14% year over year in the Q4. On Wednesday GameStop will need to build on its Q4 success and show it is playing for keeps.
For the quarter that ended April, Wall Street expect the Grapevine, TX-based company to post a per-share loss of 12 cents on revenue of $1.36 billion. This compares to the year-ago quarter when the loss was 52 cents per share on revenue of $1.38 billion. For the full year, ending in December, the loss is expected to be 30 cents per share, narrowing from $1.01 a year ago, while full-year revenue of $5.88 billion would decline 0.7% year over year.
Evidenced by the 30% one-year decline in the stock, there is a lack of sustained confidence investors have in GameStop’s business. This shaky resolve stems from the fact that the company remains highly dependent upon the sale of video game consoles and when video game publishers release new games — an industry that is highly cyclical.
To date, the management has had to make some hard decisions, including reducing the company’s headcount, to boost cash flow and the bottom line. Some of these decisions have worked, yielding a surprised profit in the fourth quarter which sent the stock surging. The headline number was the surprise profit of $48.2 million, reversing a net loss last year of $147.5 million. The cost cutting initiatives and headcount reductions aimed at boosting operational efficiency have begun to bear fruit.
But it wasn’t all good news. During the quarter, revenue fell about 1% year over year to $2.25 billion. The company is still struggling to define what it wants to be and the value proposition it offers to customers. On Wednesday for the stock to continue to climb, GameStop must deliver a top and bottom line beat, while showing significant margin and revenue improvement.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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