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Can GameStop earnings spur share price gains?

The GameStop share price climbed 1,914% from $17.25 at the close on 4 January this year to $347.51 at the close on 27 January. The rocketing rise of the video games and console omnichannel retailer was driven by a social media campaign by so-called “point-and-click” Reddit investors.

However, the GameStop share price [GME] slumped again to $40.69 at the close on 18 February as trading apps such as Robinhood limited the buying of its stock due to market volatility.

The GameStop share price bounced back to hit $302.56 at the close on 9 June as Reddit investors held their positions, while others were buoyed by shareholder Ryan Cohen, who wants to accelerate its focus on ecommerce.

The GameStop share price fell once again to $152.90 at the close on 19 August as investors fretted over a potential drop in video games demand as lockdown ended and its high $15.3bn valuation.

But the GameStop share price has bounced back once again to $202.75 at close on 3 September.

Year on year the share price is up 2,550%  in comparison with other stocks such as Amazon [AMZN], up 5.57% in the same period, and Best Buy [BBY], up 9.36% and the broader S&P 500 index up 34.04%.

As of 3 September, GameStop has a 6.76% weighting in the First Trust Nasdaq Retail ETF [FTXD], whose shares have climbed 36.54%, and a 3.85% weighting in the VanEck Vectors Social Sentiment ETF [BUZZ] as of 2 September, which has risen 11% since the start of March this year.

Investors can see if the GameStop share price will remain strong against its peers when it releases its second-quarter earnings on 8 September.

 

Sales growth defies lockdown

In the first quarter, GameStop reported net sales up 25.1% to $1.277bn despite a 12% reduction in its global store base and closures during pandemic lockdowns in Europe. Its net loss was $1.01 per share, compared with a $2.57 per share loss last time.

Wall Street expected GameStop to post revenues of $1.16bn and a loss of 84 cents per share. Moreover it did not issue an outlook for the coming quarter. In May, when it detailed results, the company said sales so far had been up 27% year on year and a potential sale of 5 million shares was on the cards.

GameStop’s share price fell from $302.56 at the close on 9 June when the results were announced, to $220.39 at the close on 10 June.

“We continue to expand our product offering such as PC gaming, computers, monitors, game tables, and gaming TVs,” said outgoing chief executive George Sherman. “We intend to continue taking steps to evolve the business and build a world-class technology infrastructure while simultaneously capitalizing on the emerging console cycle.”

GameStop said his replacement would be Matt Furlong, who joins from Amazon.

 

Cautiously optimistic outlooks

According to Zacks, GameStop is expected to post a quarterly loss of $0.42 per share, representing a year-over-year change of +70%. Revenues are expected to be $1.12bn, up 19.4%.

If GameStop misses these forecasts, particularly on loss per share, then expect its share price to drop once again.

Investors will also carefully analyse revenues to see if the pandemic boom in video gaming is beginning to wane.

“Management is making the right moves: It's decreasing GameStop's store footprint, raising equity by selling shares at inflated prices, and using the proceeds to pay down high-interest-bearing debt,”  wrote Parkev Tatevosian in Motley Fool. “Revenue is improving as economies reopen, but there is no telling when the company can generate profits annually.”

Analysts will be keen to hear from the new CEO about his plans for the group and its digital direction. Loop Capital analyst Anthony Chukumba recently told CNBC he is already unconvinced.

“GameStop’s problems have very little, if anything, to do with ecommerce. Their problem is not that they’re not a good omnichannel retailer,” he said. “The problem is that gamers are increasingly downloading video games.”

According to Market Screener, analysts have a mean consensus of sell and a $37.50 target price.

Wedbush recently upped its target price to $50 from $39, although it retained an underperform rating.

"We don't know where GameStop is headed, but it's clear that they intend to remake themselves as an Amazon-lite," Wedbush analyst Michael Pachter said. "Ryan Cohen promised investors a strategy back in mid-January. Investors are getting tired of waiting.”

However, Pachter believes the company "was positioned to be a primary beneficiary of new console launches," and has potential new transformation strategies such as non-fungible tokens.

GameStop could get another lift if reports that it is set to return to the S&P 500 are substantiated when it is rebalanced later this month.

It’s not game over yet for the video game retailing stock.

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