Case Study on GameStop (GME) with Nobias technology
Summary
GameStop shares rallied by nearly 12% on Friday after the company reported earnings.
GME missed consensus sales estimates during Q2. And, its earnings were negative.
However, the company announced a new crypto partnership which inspired a spike in bullish sentiment.
GameStop (GME) has played a starring role in the financial news cycle in recent years because of its volatile trading momentum and its leading position in the recent “meme stock” movement. In 2020, GME shares rallied from approximately $1.00/share to highs in the $75.00 range. However, GameStop has struggled throughout much of 2022, with shares down by 24.3% on a year-to-date basis.
The stock was up nearly 12% on Friday in response to its Q2 earnings report. However, credible authors and analysts are still extremely bearish on shares. in a recent article at Zacks, Derek Lewis, a Nobias 5-star rated author, summed up the meme-stock mania which broke down Wall Street’s expectations for GME coming into the company’s Q2 report.
The rise of "meme-stocks," Lewis noted, has been one of the market's most fascinating stories in recent years. Out of the group, GameStop was unquestionably the most well-liked, violently shaking the market with a short-squeeze of a rarely seen magnitude. No matter which side you were on, we can all agree on one thing – it was wild. " He goes on to point out that the “wild” momentum that GME shares have benefited from since 2020 has resulted in an abnormally high valuation.
GME Sep 2022
Lewis wrote, “The company’s shares appear elevated in valuation—its forward price-to-sales ratio of 1.4X is well above its five-year median of 0.2X and its Zacks Sector average.” Taking a look at GME’s bottom-line expectations coming into Q2, Lewis said, “the Zacks Consensus EPS Estimate of $0.38 reflects a year-over-year decline of a steep 100%.”
“However,” he continued, “the company’s top-line appears to be in much better shape – GameStop is forecasted to have generated $1.3 billion in revenue throughout the quarter, penciling in a solid 6% Y/Y uptick.”
When GameStop reported its Q2 results on September 7, 2022, the company beat analyst estimates on the bottom line, posting non-GAAP earnings-per-share of -$0.35/share. However, GME missed consensus estimates on the top line, posting $1.14 billion in sales.
Josh Arnold, a Nobias 4-star rated author, covered GME’s Q2 results in a Seeking Alpha article titled, “GameStop's Q2 Earnings Highlight Long-Term Issues”. Arnold began his piece by stating that the primary catalyst for GME’s 2020 bullish momentum has dissipated, leaving him with a bearish outlook on shares. He said, “I’ll be clear and state right up front that the short squeeze happened in early-2021 and is not going to reoccur." GME had short interest levels exceeding 100% of the float then, and shorts were scorched in spectacular fashion. Today’s short interest is around 20%, which is nowhere near high enough for the kind of move we saw earlier. "
Arnold continued, “What we have with GME is a retailer that, to my eye, is struggling to generate cash flow because, at the end of the day, its business is still a relic of the past.” Regarding the Q2 sales trend, Arnold said, “The Q2 report showed a year-over-year revenue contraction of 4%, to $1.14 billion. That’s obviously not the direction investors should want revenue to be moving, and it’s a departure from the past couple of years’ results."
Arnold mentioned that GME has been trying to diversify its revenue stream, moving away from physical game sales and into the collectables market. He stated, “That segment’s share of revenue was almost 20% in Q2, up from 15% a year ago.” Yet, Arnold continued, “That segment is still way too small to stem the tide of declines elsewhere, so the total continues to fall.”
Arnold transitioned from the top-line to the bottom-line, writing, “The second thing I’m concerned about, and even more so than sales, is that the company cannot get its act together from a margin perspective.” Regarding GME’s margin trend, he wrote, “This is ugly as we continue to see quarter after quarter of lower margins." Operating margins haven’t been positive on a TTM basis since 2019. Part of this is that gross margins have tanked and are showing no signs of slowing that descent. " Arnold stated, “Gross profit fell 12% while SG&A costs rose about 2%." That’s a massive deleveraging of SG&A costs and it is exactly the opposite of what GME needs to be showing investors. "
Furthermore, Arnold touched upon his earnings-per-share outlook, saying, “The share count rose by about 40 million in total, which means that if GME can ever achieve profitability again, it will be that much more difficult to move the needle on a per-share basis.”
The recent dilution came from equity sales, and Arnold noted that these moves by management can be viewed as positives. He said, “The good news is the big increase in shares has cleaned up GME’s balance sheet, and it ended Q2 with $909 million in cash, and almost no long-term debt." "That's fantastic, and it means the company should be able to operate for a long time, even if it’s unprofitable (which it is).”
Ultimately, though, Arnold concluded with a bearish opinion. He said, “It has bought itself some time (literally) with it [sic] share issuances, but it’s also burning through that cash at an alarming rate.” He continued, “This company is struggling in a variety of critical operating metrics, and I don’t see a path forward.”
Overall, traders didn’t share Arnold’s bearish outlook on the quarter. GME shares rallied by 11.96% on Friday, largely because of an announcement that management made during the quarterly report, which highlighted plans to enter into the cryptocurrency space.
Dan Berthiaume, a Nobias 4-star rated author, highlighted GME’s crypto plans in a recent article. Berthiaume wrote, “In its latest step toward becoming what GameStop CEO Matt Furlong publicly termed a “customer-obsessed technology company” in a March 2022 earnings call, the retailer has entered into a partnership with cryptocurrency exchange FTX U.S. According to GameStop, the partnership is intended to introduce more of its customers to FTX’s community and its marketplaces for digital assets.”
Berthiaume continued, “In addition to collaborating with FTX on new e-commerce and online marketing initiatives, GameStop will begin carrying FTX gift cards in select stores. During the term of the partnership, GameStop will be FTX’s preferred retail partner in the United States.”
Furthermore, Berthiaume touched upon GME’s plans to become an NFT marketplace. He said, “GameStop’s new cryptocurrency initiative follows its July 2022 launch of a beta version of an online platform where consumers and creators can buy, sell, and trade NFTs, which are unique digital assets stored on a blockchain ledger that certifies the owner.” He said that GME’s current platform is “a non-custodial, Ethereum Layer2 blockchain-based platform that enables users to own their digital assets."
Looking further down the road, Berthiaume said, “Over time, GameStop says its NFT marketplace will expand functionality to encompass additional categories such as Web3 gaming, more creators, and other Ethereum environments.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
In addition, Michael Grothaus, a Nobias 5-star rated author, touched upon these crypto/NFT plans in a post-earnings report as well. Grothhaus asked the hypothetical question, “Does the GameStop/FTX partnership make sense?” Then, he rescinded, “Sure. People who invest in meme stocks are also likely to invest in crypto. And GameStop has its fingers in various crypto products already as it seeks to remake itself for a new era. So the FTX partnership is understandable. "
Furthermore, Grothaus quoted GameStop CEO Matt Furlong, who highlighted his long-term vision in the company’s Q2 conference call, stating, “Our path to becoming a more diversified and tech-centric business is one that obviously carries risk and will take time. This said, we believe GameStop is a much stronger business than it was 18 months ago.”
The credible authors and analysts that the Nobias algorithm tracks who cover GME shares do not share Furlong’s bullish outlook. 63% of recent articles written about GME shares have expressed a “bearish” sentiment. Right now, the average price target being applied to GME shares by credible analysts is $6.63/share. Today, GME trades for $28.92. Therefore, this average price target implies downside potential of approximately 77%.
Disclosure: Nicholas Ward has no GME position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.