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GameStop: Light Next-Gen Console Sales Add to the Bear Case
Stock Analysis & Ideas

GameStop: Light Next-Gen Console Sales Add to the Bear Case

In January, shares of GameStop (GME) took a tour around the solar system. Driven by the Reddit retail short squeeze frenzy, the world’s media locked in on the unlikely story, which saw shares surge by 1,625% over the span of a few weeks. Of course, the balloon was bound to pop at some point, and February has already seen a reversal in fortune. The stock is down by 85% so far this month.

As has been highlighted many times, the problem with GameStop has been the disconnect between the surge and the company’s fundamentals. And the latest data following the recent release of next-gen consoles, says Merrill Lynch analyst Curtis Nagle, offers scant reason to be optimistic.

“While there have been relatively few next generation formatted games released so far, the total number of physical game units sold appears very underwhelming,” the analyst said. “In fact, for every PS5 and Xbox Series X/S console sold so far, only 0.65 physical games have been sold. We will continue to watch this trend, but it is likely at least in part due to a surge in digital penetration.”

The introduction of the next-gen consoles drove sales of hardware units up by 95% in January, whilst due to next-gen pricing, sales were up by 147%. However, Nagle points out that PlayStation/Xbox units are just at 10% what they were at this point during the previous cycle.

And although Nagle believes there is still strong “underlying” demand, the analyst thinks that for now “deep supply constraints” will continue to pay their part.

It all points to GME fundamentals being “very challenged,” and Nagle believes “structural pressures centered around digital disintermediation will be very difficult to offset and will likely worsen under the current console cycle.”

Accordingly, Nagle rates GME an Underperform (i.e. Sell) along with a price objective of $10. The implication for investors? A sharp 80% descent for the shares. (To watch Nagle’s track record, click here)

The rest of the Street’s assessment is only slightly less depressing. Going by the $14.83 average price target, there will be a 72% drop over the next 12 months. There are no buyers for GME stock right now, as the stock’s Moderate Sell consensus rating is based on 4 Holds and 3 Sells. (See GME stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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