GameStop (NYSE:GME) has been a name that has generated plenty of headlines over the past few years. Of course, the videogame retailer was at the center of the meme stock craze that saw investors push the stock – and other struggling names that followed in its wake – to improbable heights just a little over 3 years ago now.
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If that was a remarkable one-off event that became a global news sensation and led to a movie of the participants’ exploits (Dumb Money), then now the company appears to be drawing attention again due to another unusual move and not a good one at all, says Wedbush analyst Michael Pachter.
Along with reporting mixed Q3 earnings last week, that event was eclipsed by the accompanying news that the Board of Directors has given CEO Ryan Cohen and the management team permission to oversee the company’s portfolio of securities and that includes the ability to invest in other equities, i.e., Cohen and Co. can buy other stocks on behalf of GME investors.
That, says Pachter, is no less than the “most inane decision we have ever seen.”
“Investors have a myriad of investment vehicles available to them and therefore do not need GameStop to act as a mutual fund,” the analyst went on to say. “If GameStop truly believes in the value of its shares, it should use its excess cash to buy back stock. The company’s decision to invest in equities other than its own is alarming, implying that GameStop management believes it will achieve better returns by buying equities aside from its own.”
Turning now to the more prosaic affair of the actual results, the company surprisingly managed to break even on the bottom-line with adj. EPS of $0.00 beating the Street’s call by $0.08. However, revenue of $1.08 billion showed a -9.2% year-over-year drop and fell shy of expectation by $100 million.
The most interesting part of the top-line miss, says Pachter, revolved around software, which against a backdrop of a strong slate (with games like EA Sports FC 24, Marvel’s Spider-Man 2, and Super Mario Bros. Wonder) saw GameStop underperform the broader market with revenue in the segment falling 8.7% year-over-year. Pachter says GameStop is “forced to focus on physical sales in a world that is moving towards digital consumption at an accelerating pace,” with the software weakness potentially shutting out any chance that GameStop has of “achieving sustained growth,” with the company probably on course to encounter a “cash flow bleed” for the time being.
“With that said,” Pachter added, “GameStop has the cash, cash equivalents, and borrowing capacity to remain in business for the foreseeable future.”
That doesn’t make it investable, however. As such, Pachter reiterated an Underperform (i.e., Sell) rating on GME along with a $6 price target, implying shares will see downside of a big 61% in the months ahead. (To watch Pachter’s track record, click here)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
