GameStop (GME) stock has been under heavy selling pressure, falling some 25% over the last month and losing 42% in the past six months. During that time span, the S&P 500 index has only fallen by 4% and went up 1% in respective thirty days and six months.
Currently trading at around $16 per share, the stock is off near 70% from its 52-week high of around $50. Investors want to know what it will take to reverse the trend. That question, among others, may be answered when the video game retailer reports fourth quarter fiscal 2022 earnings result after the closing bell Tuesday. Unfortunately for GameStop, unlike previous years, meme stock mania hasn’t taken off in 2023.
Nevertheless, there is still excitement as the company is one of the most widely-followed stocks on the market, partly because it is owned by some prominent retail investors, and partly due to its ability for strong momentum movement. As for the recent negative trend? The company has felt the after-effects of its ill-timed partnership with the now-defunct FTX which, at the time of the partnership, aimed to introduce its customer base to the digital asset ecosystem. Now the question is, what does the brick-and-mortar video game retailer want to be?
Aside from supply chain constraints for new generation hardware, GameStop also suffered from slowing demand on certain previous generation hardware. However, the collectibles category was a bright spot, with revenue rising 8% year over year. Operating cash flow was also strong, rising to $177.3 million. On Tuesday, GameStop will need to build on its Q3 success and show it is playing for keeps.
For the quarter that ended February, Wall Street expect the Grapevine, TX-based company to post a per-share loss of 13 cents on revenue of $2.18 billion. This compares to the year-ago quarter when the loss was 46 cents per share on revenue of $2.25 billion. For the full year, the loss is expected to be $1.31 per share, wider than the year-ago loss of $1.14 per share, while full-year revenue of $5.88 billion would decline 2.2% year over year.
As evidenced by the stock's performance, Wall Street lacks confidence that the company can sustain growth in the quarters ahead. While the recent declines in the stock has stopped, revenue and earnings estimates by analysts remain weak. The lack of confidence 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.
As such, GameStop’s value proposition to consumers is limited and, in most cases, beyond its control. This was evident in the third quarter when the company missed analyst estimates on both the top and bottom line. In Q3, the company reported an adjusted loss of 31 cents, which missed estimates by 3 cents, while revenue of $1.19 billion was down 8.5% year over year and missed by a whopping $160 million, or about 12%.
The miss was driven by a decline in software sales, which fell 19% year over year from $435 million to $352 million. Despite the weak quarter, GameStop has shown some improvement in its fundamentals, demonstrating positive cash flow and an overall strong financial standing, including sitting on half a billion in net cash. That’s the bright side. For the stock to reverse its decline and start moving upward, GameStop must deliver a top and bottom line beat, while showing significant margin improvement.
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