Key points
- GameStop had a difficult and tumultuous quarter, missing earnings and earnings estimates.
- The company continues to burn cash and is not expected to stop in F2024.
- Analysts are pegging the stock at sell-off, institutional interest is low and short sellers are out in force, so new lows are likely.
- 5 stocks we prefer to GameStop
Shares of GameStop NYSE: GME have been trending down ever since the meme stock frenzy hit its first peak, and the downtrend is intact. The company continues to bleed business and liquidity, putting it in a downward spiral and investors should flee. The stock is still tradeable, but bullish traders beware; One day’s gains will likely turn into losses tomorrow, next week and next year.
As attractive as the business model is, it is based on a niche after-market business that has yet to produce sustainable growth or profitability and probably never will. If you’re wondering what the end game is for this stock, the most likely scenario is a return to pre-meme prices under $5.
No games in GameStop fourth quarter results
GameStop had a weak fourth quarter, missing Marketbeat.com’s consensus estimates for earnings and earnings. The company posted net revenue of $1.79 billion, declining 19.7% year-over-year, missing consensus by 1,200 basis points as customers reduced hardware, software and collectibles.
Hardware saw the smallest decline, 12% year-over-year, led by a 25% decline in collectibles and a 30% contraction in software. Sales are affected by inflation and interest rates, which are reducing consumers’ discretionary dollars, and there is the AI factor to consider.
With artificial intelligence on the rise and expected to be incorporated into games and consoles, the gaming market may sit back and wait for next-generation equipment rather than doubling down on old ones. As it stands, next-gen consoles aren’t expected to launch for a few years. However, technology leaders Microsoft NASDAQ:MSFT AND Sony NYSE:SONY it is expected that they will release intermediate updates in the meantime.
The margin is a positive point in the report but is not enough to change the outlook. The company improved margin sequentially and turned cash flow positive for the quarter, but the full-year results and impact on the balance sheet are far from satisfactory. The company’s cash flow was negative for the year, resulting in a 20% decline in cash and cash equivalents despite a 7.3% decline in inventories. Inventories stand at $632.5 million and continue to pose a risk; the longer it sits, the less attractive it is and the harder it is to sell.
Profits are positive but, once again, insufficient to change the outlook. The quarterly profit is not enough to offset the annual loss, the company’s last and best quarter of the year. With a sustained contraction expected over the next three quarters, this will not change. The likely scenario is that GameStop continues to bleed money as it slowly spins down the drain, posting another loss in F2025. The company offered no comment or guidance or held a conference call.
Don’t buy GameStop until serious money is involved
Aside from CEO and Chairman Ryan Cohen, a lot of money is avoiding GameStop. Wedbush is the only company to offer a rating and has the stock pegged at Sell with a $5.60 price target. This is 65% below current price action and a likely target. Institutional interest is close to 30%, but don’t put too much weight on that. It’s a small sum for a promising company. There is also the short interest to consider. Short interest was near 20% in the last report and could rise now that the price action is heading towards another new low.
Price action is not positive for bulls. This market is in a prolonged downtrend and the trend was confirmed after the release. The 18% price implosion shows strong resistance at the 150 and 30 day EMAs, aligning with the bearish price action. The stock is still above critical support at the recent low, so there is some hope. If the market can sustain that level, it may never go lower. However, if the market were to break down below $12.18, it could quickly reach towards the $5 level.
Before considering GameStop, you’ll want to hear about it.
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