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Will GameStop’s share price show it can pivot to digital?

GameStop share price: Front of GameStop store

The GameStop [GME] share price ran up sharply in August and has gained 32.7% in the month to 3 September. While the game doesn’t appear to be over yet for the meme stock, how will the market react to its second-quarter 2021 earnings, due on 8 September?
For the three months to the end of April, GameStop fared better than expected. The company reported revenue of $1.28bn versus an analysts’ forecast of $1.16bn, and up 25% from $1.02bn reported for the same period in 2020. 
The adjusted loss per share was $0.45 versus the $0.83 expected by analysts, while the company’s net loss narrowed by almost 60% to $66.8m. 
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GameStop share price slide

While the company disclosed that sales in May had jumped 27% year-over-year, it declined to give a forecast for the full year. The market didn’t take kindly to the lack of guidance, and the GameStop share price pulled back following the after-hours earnings release on 9 June. As of the close on 3 September, the GameStop share price was $202.75, down 41.8% from its six-month high of $348.50, set during trading on 10 March. 

Online sales boost

For the three months to the end of July, analysts expect GameStop to report revenue of $1.12bn on a negative EPS of $0.66, according to a consensus of four analysts. This would be an improvement on the loss per share of $1.40 on $942m in sales reported for Q2 2020. 
Investors are likely to pay close attention to how the company is progressing with its ambitious digital pivot. While online sales swelled since the first lockdown, the revenue accumulated in recent quarters hasn’t quite made up for the money lost through brick-and-mortar store closures. 
In April, the company announced Chewy [CHWY] founder and then-CEO Ryan Cohen as the chairman to reinvent the old-school video retailer. In addition, Amazon [AMZN] veteran Matt Furlong was appointed as CEO in June. 

New model needed

Despite its bold hiring spree, the general sentiment towards GameStop is not one of conviction. 
Anthony Chukumba, an analyst at Loop Capital, was one of a number of analysts to drop their coverage earlier in the year. He told CNBC that no matter how many Amazon executives GameStop hires, the company’s slow transition to digital means it’s now playing catch-up. 
“GameStop’s problems have very little, if anything, to do with ecommerce,” said Chukumba. “Their problem is not that they’re not a good omnichannel retailer. The problem is that gamers are increasingly downloading video games.”
CMC Markets’ own chief market analyst, Michael Hewson, believes Cohen has a hard task on his hands. “Cohen will need to convince people that it’s not enough to just cut costs to sustain a tired business model, but he will also have to turn around a model where revenues have been in decline since 2018.”
Even though the company needs to start making money to stop the decline, an earnings miss and slowing revenue growth wouldn’t stop the shares going higher, argues Hewson, because fundamentals often don’t matter when a stock has retail investors behind it fuelling short squeezes. 
The GameStop share price could get a second wind if the stock is added to the S&P 500 when the index is rebalanced later this year, reported the Wall Street Journal.
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