The momentum in meme stocks have returned, driving shares of GameStop (GME) 60% higher over the past thirty days. Its shares, which have skyrocketed 1270% year to date, are up 1500% in the past six months. But investors want to know whether the company has a working business model beyond the social media-driven stock mania.
The Reddit-induced explosion in the stock and various subsequent declines suggests that fundamentals don’t currently matter. But will they eventually? The company can answer that important question on Wednesday when it reports first quarter fiscal 2021 earnings result after the closing bell. The uncertainty in that question is one reason Bank of America analyst Curtis Nagle, who had an Underperform rating and $10 price target on the stock, recently pulled its coverage on the company.
"Up until the last several weeks, GME’s trading daily trading volumes and Reddit mentions had declined materially,” noted Nagle. “However over the past seven trading days there has been a resurgence in mentions and volumes which has corresponded with a 56% increase in GME’s share price.” In other words, GameStop does not trade on fundamentals and its share price is highly correlated to how often its name is mentioned on Reddit. But it’s not all about Reddit. Investors are excited about new gaming cycle from Microsoft’s (MSFT) Xbox and Sony (SNE) Playstation.
Reports suggests demand for consoles is currently outpacing supply. Ordinarily this would bode well for GameStop, but the brick-and-mortar retailer, often referred to as the "next Blockbuster Video," must quickly pivot its business to capture the interest in online gaming. On Wednesday this is what investors will want to hear from Ryan Cohen, Chewy (CHWY) founder, who is charged with turning GameStop into an e-commerce power. The post-earnings call will be closely watched for any commentary about what is expected in the quarters ahead.
For the quarter that ended January, Wall Street expect the Grapevine, TX-based company to lose 71 cents per share on revenue of $1.16 billion. This compares to the year-ago quarter when the loss was to $1.61 per share on revenue of $1.07 billion. For the full year, ending in January, the loss is expected to be 69 cents per share, up from a loss of $2.14 per share a year ago, while full-year revenue of $5.48 billion would rise 7.7% year over year.
The WallStreetBets community has been largely credited for GameStop’s stock performance. The company has delivered declining revenue over the last four years, while posting losses for the past two years which has surpassed $1.2 billion. Losses are expected for the next several years, driven by video games being downloaded online instead of the need to purchase the physical discs. And that’s where the arrival of Chewy founder Ryan Cohen becomes magnified.
That shift has begun evidenced by 175% surge in global e-commerce revenue, reaching $720 million in Q4. That total accounted for 34% of consolidated Q4 revenues, compared to just 12% in fiscal 2019. Notably, 2020 e-commerce revenue surged 191% compared to 2019. While turning around GameStop’s business will be a challenge, given that the company has nearly 5,000 physical stores, it is clear that meaningful progress is being made.
The massive store total in and of itself presents a challenge in scaling down. But the company on Wednesday will need to show that it is up to the challenge and has more value beyond the recent social media frenzy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.