GameStop has been in the market for a long time, but by 2021 its activity was almost at an end. The company was founded in 2001 when the video game industry was gaining momentum, and GameStop, as a video game retailer, was growing in parallel with the industry. It was the place to buy the latest game consoles and games. Moreover, GameStop customers could save money by exchanging games they didn’t need for new or other used ones.
The company was doing well until the era of online sales. Video games could be downloaded on the Internet, and nobody wanted to play games on the media anymore. It was the time of Xbox Live, PlayStation, Nintendo, but GameStop rapidly lost its popularity.
Because of the coronavirus pandemic, GameStop had to close 3,500 stores, preserving online and side sales. It was online trading that saved the company from total collapse. In 2020, during the lockdowns, many turned to video games as their only outlet. At the time, the chain’s online sales were up 520 percent, while retail sales were down more than 30 percent.
That all changed in 2021 when GameStop was again in the spotlight of investors.
Anything is possible
The SEC investigated the January surge of meme stocks, including GameStop. The report of the regulator denied the main version of the reasons for the rise of these securities.
As previously thought, retail investors from Reddit banded together to buy meme stocks to “punish” large hedge funds that were betting that the securities of these companies would go down in price.
The dispersal of quotes led to a short-squeeze – a situation where investors who were selling shares were forced to buy them back, which led to an even greater increase in the price.
The SEC report states that the surge in stocks at the beginning of the year was caused by a rapid increase in the number of investors who bought the securities rather than by a mass closing of short positions.
The rise in GameStop’s stock price was mainly due to the 880,000 new investors who bought the shares in January 2021.
In addition to retail investors, GameStop shares were purchased by institutional investors, including several hedge funds that joined the market rally at the time.
GameStop’s disappointing earnings
If you are going to buy this paper, you need to know the fundamentals. In the market, stocks of companies can rise under the influence of sentiment or technical factors. However, the company needs to make money and show steady growth to maintain shareholder interest. Alas, GameStop is not very successful at this.
GameStop plans to release its Q3 report in December. Should we expect something supernatural? We don’t think so! Let’s see what we can expect based on the Q2 report.
At that time, GameStop lost $0.85 per share, which was much worse than predicted. At the same time, the issuer’s revenue increased by 25% compared to last year. At first glance, it may seem like a good result. But there’s nothing to be proud of, given that the company’s stores were closed for most of the 2nd quarter of 2020. The weakness in performance is also evidenced by the fact that the company has not been able to take advantage of the U.S. economic recovery, despite the strong demand for video games.
Overall, the company lost $58 million during the earnings period, with sales revenues of $1.18 billion. That’s about a minus 5% profit.
In terms of profits, GameStop is also an extremely expensive company. GameStop is projected to continue to lose money in 2022, and by 2023, the issuer will generate $0.15 per share in operating income. It would add up to a P/E ratio of about 1,400.
GameStop’s transformation strategy
Many have given up on the company. Nevertheless, the company believes it is too early to write it off. GameStop’s management is still nurturing plans to transform the company into an e-commerce giant. The chances of success are slim. However, it remains the leading brand in the gaming industry, and it can still stay in the market.
For example, during the 2020 lockdowns, traffic to the company’s website increased by 1,000%. However, the video game industry is experiencing transformation, increasingly moving away from physical sales to digital sales. Video game developers are increasingly offering subscription-based games to customers.
It means that the need for GameStop services will decrease year after year. GameStop should have an effective business strategy to tip the scales back in its favor, but so far, there is none.
What is the verdict?
Should you sell the company’s shares? If you already have open deals, it’s better to hold off on selling. We are likely to have another winter with COVID-19. What else is there to do during the winter vacations and cold evenings? Video games, of course. It means that the video game industry will get more than a billion during that time, and GameStop, as part of that industry, will also get its share. You might start to worry if the paper breaks through the $180 level and stays under it. In that case, we should think about selling.
Nevertheless, we think that the stock has upside potential, and the target for this growth could be the $250 level.
If you don’t have GameStop shares, it’s better not to buy them. There are hundreds of other companies in the market with better results and less risk.
Last week’s quarterly reports
Salesforce ended Q3 with earnings of $468 million, or $0.47 per share. Sales were $6.86 billion, up from $5.42 billion in the same period in 2020. Revenue was up 27% year over year, climbing to $6.9 billion, falling slightly short of the forecast.
Salesforce’s adjusted net income showed a 27% decline, dropping to $1.3 billion, or $1.27 per share, but was still better than the $0.35 forecast.
Investors were disappointed by the report. As a result, the correction began, and the paper fell to $250. Sales stopped here, but it will be possible to speak about growth only after the breakdown of $270 and fixation above it.
Zscaler also reported its Q1 2022 profit and loss last week. According to the report, the issuer’s profit was $0.14, while the forecast was $0.12 per share. Total revenue exceeded $230 million, while analysts were expecting $208.43 million. Compared to last year, the figure was up 62%.
After the report, the shares of the issuer also went down, but this time the fall was not so long. The correction stopped at the level of $299, from which the rebound took place. If support remains at $300, we expect prices to return to the annual highs.