Is it time to buy the dip in GameStop (GME)? The brick-and-mortar retailer has seen its market cap plummet over the past six months and one year, losing 51% and 64%, respectively, during that span. With shares down almost 40% year-to-date, the company is once again trying to re-invent itself.
Investors are asking: Does GameStop know what it wants to be? The company will be asked that question on Thursday when it reports fourth quarter fiscal 2021 earnings result after the closing bell. Digital downloads have hurt the company’s primary business model, revenues, and cash flow. Previous attempts to pivot into stronger growth areas have come with mixed results. However, the company’s latest attempt, which involves NFTs, a digital asset marketplace and crypto gaming, could provide a power boost.
The company must still answer a very important question: How will it work? The company recently formed a partnership with Immutable X, and according to the announcement, will grant up to $150 million in IMX tokens to GameStop upon the achievement of certain milestones. It is still unclear how successful this latest pivot will become, and while GameStop deserves credit for trying all it can to remain relevant, at some point it must show it has found the right formula.
For the quarter that ended January, Wall Street expect the Grapevine, TX-based company to earn 84 cents per share on revenue of $2.22 billion. This compares to the year-ago quarter when earnings were $1.34 per share on revenue of $2.12 billion. For the full year, the loss is expected to be $1.69 per share, narrower than the year-ago loss of $2.14 per share, while full-year revenue of $5.97 billion would rise 17.3% year over year.
While GameStop shares have suffered immensely over the past six months, the company’s fundamentals have vastly improved beyond the meme stock craze that had generated wild swings in the past. For example, assuming the revenue for quarter does hit $2.22 billion, this would put the company roughly in the same position it was back in 2019. Notably, this is even as the company is much leaner today and operates fewer retail stores and having divested various unprofitable businesses.
However, the bears will point out that the company has not shown that it can successfully transform its business. In the most recent quarter, the company’s EPS missed analysts' estimates by 169%. This is even though Q3 revenue of $1.3 billion came in higher than expected, beating estimates by more than 9%. Nevertheless, that performance was still less than the revenue of $1.4 billion it recorded in 2019 and over $1.9 billion in 2018. What’s more, the company’s Q3 gross margins of 24.6% was down from 27.5% a year earlier.
Elsewhere, Q3 operating expenses also rose 17% year over year which led to a wider Q3 operating loss of $103 million, up from $84 million. In other words, GameStop’s business is still not fully back to pre-pandemic levels. Can the company’s pivot to NFTs, which recorded over $12 billion in sales on the Ethereum blockchain in 2021, buy GameStop CEO Matt Furlong the time he needs to execute?
For GameStop’s NFT move to be successful, the company will required a blockbuster game in order to drive the sort of revenues needed to boost cash flow and profits. On Thursday for the stock to rebound the company will need to show that it can build a successful pivot towards NFTs.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.