Easily one of the biggest stocks of the last six months has been GameStop (
NYSE:GME). Partially benefiting from the simultaneous arrivals of a new console generation and a pandemic that kept most indoors for months, and partially benefiting from its status as a “
meme stock”, GameStop has seen incredible gains in the last few months, gains largely unsupported by fundamentals. Recently the company declared its earnings, and underscores the point about fundamentals nicely.
Earnings Fail to Impress
On the plus side, GameStop did post a profit in the most recent quarter, and a fairly decent one as well. The quarter ending January 30 brought with it profit of $1.34 per share, which is terrific objectively, but subjectively, falls apart. Analyst projections were looking for the company to post $1.43 per share, which is a minor, but present, misstep.
Joseph Feldman, an analyst with Telsey Advisory Group, noted that the decent EPS figures weren't the result of improving sales, but rather, a tax benefit that made otherwise disastrous profit figures look more like a minor misstep.
Revenue was similarly brisk, but not as brisk as analysts hoped for; the company posted $2.12 billion in revenue for the quarter yet was expected to pull in $2.21 billion by Refinitiv studies.
The biggest point of the earnings call, meanwhile, turned out to be almost equal parts disappointment and liability. The company's planned digital transformation disappointed substantially, noted Feldman again, with the output sounding less like the produce of several new tech-oriented board members and more like the same basic concept as most other retailers. Feldman summed up perhaps the biggest problem facing GameStop by noting that the company didn't even take questions on the new digital-focused plan.
A Stable Crisis of Confidence
The word from the broader analyst market, based on our latest research, remains disappointed in GameStop as a whole. Last year at this time—when the pandemic was just getting started and GameStop was running as mostly normal—the company had four “sell” and four “hold” ratings to its credit. Six months ago, meanwhile, the company had improved a bit, turning in just three “sell” ratings along with its four “hold”. Three months ago, things had improved just a bit more, down to three “hold” and three “sell.” Today, however, it's right back to where things were six months ago, with three “sell” and four “hold”.
The price target, meanwhile, has been on a roller coaster ride. The company spent most of 2020 struggling to get out of single-digit territory, which it started to do in December, clearing $20.15 on December 26. The Reddit-driven frenzy kicked in not long after that, with the price target averaging $347.51 on January 28. A series of slips, drops, and hikes later brings us to today, where the average is floating around $13.36. Just today, Wedbush dropped its rating to “underperform” from “neutral” with a price target of $29, and Telsey dropped its price target from $33 to $30.
Yet even as Wedbush hiked its rating—considering the management execution to be, on par, “excellent”--its analyst, Michael Pachter, still noted that the stock price had very little relation to the company's fundamentals.
Disconnected From The Fundamentals
Pachter's pithy statement is an excellent summation of what's been going on at GameStop, and makes one other move—the plan to potentially release more shares as a way to build funding for its digital transformation—particularly tragic. GameStop's gains over the last three or four months have not been connected to improved sales, profitability, or any other metric. GameStop's gains have basically come about as the result of a giant online protest against hedge funds and the like that basically looked to take a wildly-shorted stock and pump it to the moon, thus hitting the short-sellers square in the wallet.
For GameStop to look at these gains and consider this a good time to release more stock reveals further disconnect, and this time, not just from the fundamentals. Give GameStop some credit, though; its realization that brick-and-mortar alone is not the way forward is true if not necessarily timely. Its response to this increasing fact of life seems to be lacking, however, a point that may leave it behind the eight-ball going forward.
The broader analyst pool doesn't have much faith in GameStop's recovery. Its plan to pursue more online selling is worthwhile but will be fraught with competition from go, including from online retail juggernaut Amazon (NASDAQ:AMZN). If you were part of the massive Reddit run-up in GameStop, it's a great time to take profit, and potentially reconsider re-investing back when the stock's more appropriate price is found.
Companies in This Article:
