Must-See Analysis: Is GameStop (GME) a Buy, Hold, or Sell Ahead of Earnings Unveiling?

GameStop Corporation (GME), which primarily sells video games and gaming consoles, posted its fourth consecutive drop in quarterly revenue and missed analyst estimates for the first quarter of fiscal 2023 as consumers cut back on non-essential spending amid inflationary pressures and an uncertain economy.

The company reported first-quarter revenue of $1.24 billion, down nearly 10% year-over-year. Revenue missed analysts’ average estimate of 1.36 billion, according to Refinitiv. GME posted an adjusted loss of $0.14 per share, less than the expected loss of $0.17 per share.

The company is set to release its second quarter fiscal 2023 results on September 6, 2023, after the market’s closing. For GME to surpass Wall Street estimates, the company must report a lower-than-$0.14 per share loss or a year-over-year improvement of more than 60%.

Analysts expect the company’s revenue for the quarter to be $1.14 billion, up 0.5% year-over-year. The company failed to surpass the consensus revenue estimates in three of the trailing four quarters, which is disappointing.

The signature meme stock has been one of the most widely followed stocks on the market. The retailer has witnessed significant rallies in the past driven by retail investors’ interest, especially during the peak of the COVID-19 pandemic when the stock market was in the grip of meme mania.
However, this year, the stock has not performed as investors hoped it would. Shares of GME have plunged nearly 15% over the past month and more than 30% over the past year. But the stock has gained close to 7% year-to-date.

GME’s shares were boosted, with newly appointed executive chairman Ryan Cohen raising his ownership stake through his RC Ventures company. According to an SEC filing, the transaction happened on June 9, with Cohen paying $10 million for 443,842 GameStop shares. Cohen owns 36,847,842 shares of GME in total.
Here are the factors that could affect GME’s performance in the upcoming months:

Mixed Financials

For the first quarter that ended October 29, 2022, GME’s net sales decreased 10.3% year-over-year to $1.24 billion, and its gross profit came in at $287.30 million, down 3.8% year-over-year. Also, the company’s adjusted operating loss was $51.20 million for the quarter.
In addition, GME’s adjusted EBITDA loss stood at $29.40 million. The company reported an adjusted net loss and adjusted loss per share of $42.30 million and $0.14, respectively.

However, the company’s cost-cutting measures showed signs of working as its selling, general and administrative (SG&A) expenses reduced to $345.70 million, compared to $452.20 million in the previous year’s first quarter. Moreover, its cash and cash equivalents came in at $1.06 billion as of April 29, 2023, versus 1.04 billion as of April 30, 2022.

Major Executive Shake-Up

After reporting a decline in revenue and a narrowed loss in its first quarter, the company announced the leadership shake-up, terminating CEO Matt Furlong in June after serving GameStop for the past two years. The retailer also said that Ryan Cohen will see his role at GME change from chairman to executive chairman.

As executive chairman, he will be tasked with “capital allocation, evaluating potential investments and acquisitions, and overseeing the managers of the Company’s holdings,” according to the SEC filing.

Further, GameStop’s CFO Diana Saadeh-Jajeh, who resigned on August 11 after serving for about a year, marks the second high-profile exit in two months.

Crypto Wallet Take-Down

GME, once a giant among video game retailers, has witnessed its star fade for more than a decade. The struggling retailer hoped a bet on crypto would partially reverse its fall, launching a digital asset wallet in May 2022 that allows games and others to store, send, receive, and use cryptos and non-fungible tokens (NFTs) across decentralized apps within having to leave their web browsers.

However, last month, the company announced discontinuing its crypto wallets “due to the regulatory uncertainty of the crypto space.” The retailer will remove its wallets, which operate through iOS and Chrome extensions, from the market on November 1, 2023.

Mixed Historical Growth

Over the past three years, GME’s revenue declined at a CAGR of 0.9%. Its tangible book value increased at a CAGR of 43% over the same period. Also, the company’s total assets and levered free cash flow grew at 7.5% and 38.8% CAGRs over the same time frame, respectively.

Unfavorable Analyst Estimates

Analysts expect GME’s revenue to decline 3.7% year-over-year to $5.71 billion for the fiscal year ending January 2024. The company’s EPS is expected to remain negative for at least two fiscal years.

For the fiscal year 2025, analysts expect GME’s revenue to decrease 3% from the previous year to $5.53 billion.

Bottom Line

During the first quarter of 2023, GameStop witnessed a revenue drop and incurred losses due to the disappointing performance of new game releases. However, the company’s cost-cutting strategy resulted in lower expenses and improved cash.

While there could be a slight increase in net sales during the second quarter, and its loss might be narrowed, GME’s prospects look challenging.
Even though the company continues its transition from brick-and-mortar to a digital focus, there are no signs of meaningful improvement, with the primary reason being a weakness in its core business of trading physical video games, which has suffered a significant decline due to the gaming industry’s digitalization.

Also, GME’s hopes for cryptocurrencies to boost its financial position have been dashed since the company decided to discontinue its crypto wallet, citing regulatory uncertainty in the crypto space.

Meanwhile, investors could keep a close eye on GME’s expenses, reflecting the effectiveness of its cost-cutting strategy and the company’s growth as chairman Ryan Cohen temporarily stepped into the CEO role, reaffirming his commitment to GameStop’s long-term success.
Given GME’s relatively bleak financial performance and an uncertain near-term outlook, it could be wise to avoid this stock until its upcoming earnings release.

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