GameStop: Better than expected is just plain bad news

Key Points

• GameStop had a mixed quarter with better-than-expected margins and cash flows, but shares fell 5% anyway. 
• Each good detail is offset by signs of struggle that suggest persistent weakness in the coming quarters. 
• High short interest, low institutional involvement and analysts play into the stock's downtrend, which remains intact. 

GameStop NASDAQ: GME had a mixed Q3 that reveals some improvement in operations attributable to new CEO Ryan Cohen. Among the Easter Eggs are a better-than-expected bottom line, positive cash flow and an increase in cash offset by numerous signs of continued struggle for this consumer tech company. 

The takeaway is that GameStop controls costs and might get into a solid position to rebound if only the consumer market were in better shape. Declining sales in all categories suggest a persistent weakening of the top-line and earnings pressure regardless of whatever cost controls or pricing leverage the company can squeeze out. 

In this environment, it is unlikely that GameStop shares will be able to post a significant rally soon, and if they do, it’ll be a fine time for the bears to build on their short positions. Because the short interest continues to trend above 20%, institutional support is low, and the analysts don’t care, it is more likely that GME shares will continue to trend lower and may reach penny stock levels in 2024. The single analyst with a rating showing on Marketbeat’s tracking pages is Wedbush’s team, led by Dan Ives, and they rate it at Underperform with a $6 price tag. 

GameStop has a mixed quarter; shares fall 

GameStop had a mixed quarter, with revenue weakness offset by earnings strength, but the news was not enough to spark bullish activity. The company’s $1.08 billion in revenue is down 9.2% compared to last year and missed consensus by 950 basis points due to weakness in all categories. Hardware, the bulk of the business revenue, is down 7.5%, with Software down 8.75% and Collectibles (a growth engine) at a more resounding -14%. 

The margin news is the best the company offers but comes with a significant but. The company widened its gross margin and narrowed its SG&A costs to produce a “break-even” quarter, but semantics play a role in the news. The break-even quarter is adjusted earnings of $0.00 that gloss over the fact another net loss was posted. The net loss is down significantly from last year to about 0.3% of revenue, but a loss nonetheless. Assuming that revenue weakness persists, and there is no reason to think the holiday quarter will produce growth, deleveraging will continue to impact earnings and offset cost controls. 

The balance sheet is OK, but not enough for the bulls

GameStop’s balance sheet is still in fine shape, but improvements may be temporary, given the expectation for top-line weakness. The company’s inventory is down, and its cash balance is up, but the increase in cash is less than the inventory reduction, and assets are down. Liabilities are also down, aiding shareholder equity by a marginal amount, but significant risks remain while net losses continue to pile up. The company did not offer guidance or host a conference call, suggesting a lack of clarity in the outlook and an unwillingness to answer potentially tricky questions. 

Among the reporting details is a change to the company’s investment policy. The board authorized the purchase of equity securities alongside debt instruments with excess cash. The company has no plans to invest in securities at this time. 

The technical outlook: GameStop downtrend intact

Regardless of the results or how individual investors may view them, the downtrend in GME shares is intact. The post-release action has the market down more than 5%, confirming resistance at the 150-day EMA. This aligns with prior signals and suggests at least a retest of the recent lows. The recent lows may provide support, but that is a big maybe. If this market falls through the recent lows near $12, a move below $10 is likely.