It’s a big day for GameStop (NYSE: GME), the video game retailer that expanded into electronics, became a meme, went to the moon, and then lost most of its enormous gains. Today it reported earnings, and the news proved mixed but sufficiently encouraging to investors to spark a rally.
The news wasn’t all bad, nor was it all good. Earnings per share proved a surprise winner, of sorts. The company posted a loss of $0.35 per share. TipRanks consensus estimates called for a loss of $0.41 per share. Revenue, however, proved a disappointment. The company posted $1.14 billion in earnings, though the consensus looked for $1.27 billion.
I have long been bearish on GameStop, and nothing I saw today has changed that perception. I marvel at how long this company has lasted, despite so much working against it.
Its business model is in tatters, and its hopes for the future are slim. Throw in worsening macroeconomic conditions, and the end result is all the reason I need to stay away from this one.
The last 12 months for GameStop shares have been on a bumpy ride down for the most part. A year ago, at this time, shares were up around $50. By late November, they briefly broke through $60. Those gains didn’t last long, and by March 2022, GameStop fell to just under $19. More ups and downs followed, leading us to the present day, where shares are trading at around $26 per share.
What is the Prediction for GME Stock?
Turning to Wall Street, GameStop has a Moderate Sell consensus rating. That’s based on one Sell assigned in the past three months. GameStop’s price target of $7.50 implies 68.8% downside potential.
Investor Sentiment Features Bullish Insiders, Bearish Everyone Else
Pessimism about GameStop’s future runs throughout the investing ecosystem. GameStop currently has a Smart Score of 1 out of 10 on TipRanks. That serves as both the lowest score and the lowest level of “underperform.” Thus, it’s clear that most investors aren’t looking for big gains out of GameStop.
However, there’s one place where some optimism reigns, and that’s one of the oddest places of all: insider trading. Insider trading at GameStop is heavily Buy-weighted and has been for months. While none of the Buys have been Informative Buys, the sheer numbers in aggregate offer some insight here.
Over the last three months, Buy transactions beat Sell transactions by six to one.
The picture looks even brighter going back over the full year, where buyers again led sellers, this time by 11 Buy transactions to three sell transactions. To find an Informative Buy, however, you have to go back six months.
The Only Real Problem with GameStop is GameStop
As I mentioned previously, I’m always surprised this company is still around. Its business model is inherently in jeopardy, and that model only worsens when you throw massive inflation and terrible economic conditions into the mix.
GameStop’s primary stock in trade is new and used video games. Used video game sales were a great idea, allowing customers to pick up older games at comparative discounts and also trade in their old games for credit toward new ones.
It was a perfectly self-sustaining model; people bought new games and traded them in later, getting at least some credit toward other new games. Then, GameStop would mark up the used games, selling them for significantly more than they paid to get them. The old games could even be traded back in later to be resold for further profit.
In fact, the only thing that could derail that profit line would be for most people to buy games online direct from publishers or from a centralized hub managed by the system platform itself – and that’s what happened.
One need only look at Microsoft’s (NASDAQ: MSFT) Xbox One S for proof of that one. The Xbox One S has no disc drive. While previous gaming consoles offered added value by allowing users to play DVD or Blu-Ray discs, the Xbox One S offered a discount gaming experience by only offering digital downloading of games.
While the somewhat more advanced Xbox One X continues to allow for disc access, actually finding one available for purchase has been a challenge for the last two years.
Before that, Microsoft facilitated digital game downloads for years. Its Xbox Live platform, as well as its more recent Xbox Cloud Gaming, paved the way for making digital downloads a part of everyday gaming. It’s also made GameStop much less relevant.
As recently as February, gaming industry studies revealed that physical games are a vanishing breed. Ars Technica found that the total number of physical game releases is on the decline and has been since at least 2018.
In 2018, there were 321 physical game releases. 2019 saw that number drop to 307. In 2020, that fell to 233, and just last year, that number dropped again to 226.
Fewer games purchased physically and fewer games available physically taint GameStop’s entire business model. While it’s made some efforts to pull out of that death spiral—made possible by the influx of cash from meme investors—those efforts haven’t exactly been effective.
Its move to online operations hasn’t helped sales much, especially with major platforms like Microsoft offering their own sales venues. Its move into non-fungible tokens (NFTs) had some success, but it was limited.
After an initial burst of interest, consumers left in droves, leaving GameStop to pull in a cut of the sales that measured about $140,000 in revenue for 30 days of operation.
GameStop is doubling down on digital asset sales, however. Earlier today, it announced a new partnership with FTX US. The move looks to draw more attention to GameStop’s lineup of digital assets. Meanwhile, certain GameStop stores will start offering FTX gift cards.
Conclusion: Low Appeal, Multiple Risks, a Bad Idea
Right now, GameStop is in a terrible position. It’s trading several times above its lowest and highest price targets, which suggests that the stock’s value is no longer connected to fundamentals in any clear way. It’s facing growing numbers of competitors in its online trade, and its retail storefronts don’t have much room for growth.
With GME’s primary stock in trade dwindling, trying to find a replacement will be a tall order. Either that or the company will have to shut down huge numbers of storefronts just to keep above water.
The latest earnings report won’t do it any favors, either. It came out ahead of consensus, yes, but it still turned in negative earnings. It hasn’t posted a positive quarter since March, and that was clearly holiday-assisted.
Its forays into NFTs didn’t exactly go far, and while it’s stepping up its momentum in digital asset sales, it’s hard to see how well digital pictures will sell in an environment where people are having a hard enough time keeping the lights on and the kids fed. It’s all the reason I need to stay out of GameStop, and that’s why I’m bearish.
