Hobbit Business Review

Is GameStop (GME) a Buy or Sell Before Earnings?

ameStop (GME) missed first-quarter revenue and earnings estimates, and its near-term prospects look bleak. Moreover, the stock has been on a downtrend over the past few months amid the leadership shake-up and discontinuation of its crypto wallet operations. Amid this, let’s find out if GME is a buy or sell before its second-quarter earnings. Read more to know….

Video game retailer GameStop Corp. (GME) reported its fourth consecutive decline in quarterly revenue and missed analyst estimates for revenue and earnings for the first quarter that ended April 29, 2023, as consumers dialed back discretionary spending in an uncertain economy.

GME posted first-quarter revenue of $1.24 billion, lower than the consensus estimate of $1.36 billion, and its adjusted loss per share came in at $0.14, compared to analysts’ estimate of $0.12. Moreover, the company failed to surpass the consensus revenue estimates in three of the trailing four quarters.

After posting a drop in revenue and incurring losses in the first quarter, the specialty retailer announced the executive shake-up, firing CEO Mattew Furlong in June and appointing Ryan Cohen as executive chairman.

“We believe the combination of these efforts to stabilize and optimize our core business and achieve sustained profitability while also focusing on capital allocation under Mr. Cohen’s leadership will further unlock long-term value creation for our stockholders,” the SEC filing states.

Cohen, through his investment firm, RC Ventures, upped his stake to 12.1% or owned about 36,847,842 shares of GME in total, according to the filings.

Furthermore, GameStop’s CFO Diana Saadeh-Jajeh, who resigned on August 11 after serving the company for about a year, marks the second high-profile exit in two months.

GME is scheduled to release its second quarter fiscal 2023 results on September 6, 2023, after the market’s closing. Analysts expect the company to report a loss of $0.14 per share for the quarter that ended July 2023. Its revenue for the to-be-reported quarter is expected to grow 0.5% year-over-year to $1.14 billion.

GME was the flagbearer of the meme stock trade. It became immensely popular in 2021 during the peak of the COVID-19 pandemic when its share price witnessed a sharp rise due to speculative trading by retail investors. However, the stock failed to sustain at this price level as its fundamentals did not back it. Also, this year, it has not performed as investors hoped it would.

Shares of GME have declined 15.3% over the past month and 33.3% over the past year to close the last trading session at $18.42. The stock is currently trading below its 50-day and 200-day moving averages of $21.27 and $21.45, respectively, indicating a downtrend.

Here are the factors that could affect GME’s performance in the upcoming months:

Recent Negative Development

GME, once a giant among video game retailers, has experienced its star fade for more than a decade. The struggling retailer hoped a bet on crypto would partially reverse its fall, launching a digital asset wallet in May 2022 that allows games and others to store, send, receive, and use cryptos and non-fungible tokens (NFTs) across decentralized apps within having to leave their web browsers.

However, last month, the company announced discontinuing its crypto wallets “due to the regulatory uncertainty of the crypto space.” The retailer decided to remove its wallets, which operate through iOS and Chrome extensions, from the market on November 1, 2023.

Deteriorating Financials

For the first quarter of fiscal 2023, GME’s net sales declined 10.3% year-over-year to $1.24 billion, and its gross profit came in at $287.30 million, down 3.8% year-over-year. The company reported an adjusted operating loss of $51.20 million for the quarter.

Additionally, GME’s adjusted EBITDA loss came in at $29.40 million. The company posted an adjusted net loss and adjusted loss per share of $42.30 million and $0.14, respectively.

Disappointing Analyst Estimates

Analysts expect GME’s revenue to decline 3.7% year-over-year to $5.71 billion for the fiscal year ending January 2024. The company is expected to report a loss per share of $0.26 for the ongoing year. For the fiscal year 2025, Street expects GME’s revenue to decline 3% from the previous year to $5.53 billion.

Further, the company is estimated to report a loss of $0.25 per share for the next fiscal year.

Elevated Valuation

In terms of forward EV/EBITDA, GME is currently trading at 441.85x, 4,421% higher than the industry average of 9.77x. Likewise, the stock’s forward Price/Sales multiple of 0.98 is 11.7% higher than the industry average of 0.88.

In addition, GME’s trailing-12-month Price/Book and Price/Cash Flow multiples of 4.41 and 18.13 compare to the respective industry averages of 100.59% and 98.02%.

POWR Ratings Reflect Uncertainty

GME has an overall D rating, translating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. GME has a D grade for Value, consistent with its higher-than-industry valuation. The stock has a D grade for Sentiment, in sync with its unfavorable analyst expectations.

In addition, the stock’s 24-month beta of 1.86 justifies the Stability grade of D.

GME is ranked #40 of 44 stocks in the Specialty Retailers industry.

Beyond what I have stated above, we have also given GME grades for Quality, Growth, and Momentum. Get all GME’s POWR Ratings here.

Bottom Line

GME’s first-quarter revenue witnessed a fourth consecutive drop, and the company missed analyst estimates for earnings and revenue. Furthermore, investors are bearish about its growth prospects. GME’s core business of selling physical video games is shrinking due to evolving consumer preferences amid the rapid digitalization of the gaming industry.

Given GME’s disappointing financial performance, weak growth prospects, and high valuation, we think it would be wise to sell this stock before its upcoming earnings release.

Stocks to Consider Instead of GameStop Corp. (GME)

The odds of GME outperforming in the weeks and months ahead are greatly compromised. However, you can check out these other stocks within the Specialty Retailers industry, which are A-rated (Strong Buy) or B-rated (Buy):

Aaron’s, Inc. (AAN)

Live Ventures Incorporated (LIVE)

Torrid Holdings Inc. (CURV)

For exploring more A and B-rated specialty retailer stocks, click here.

43 Year Investment Pro Shares Top Picks

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GME shares rose $0.08 (+0.43%) in premarket trading Tuesday. Year-to-date, GME has gained 0.16%, versus a 18.78% rise in the benchmark S&P 500 index during the same period.

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