Gamestop Falls After Earnings, The Bears Are In Control

The Gamestop Transformation Doesn’t Matter ... Yet 

The Gamestop (NYSE: GME) earnings report and price action that followed reinforces our viewpoint on the stock. Stay away from this company, stay far far away. At this point in the game, there is no telling what the true value is because price action has been completely derailed from its fundamentals. On the one hand, we have the bears who’ve driven short interest up to 30% and kept it there, while on the other is the Reddit crowd and its two-pronged hope. Hope to squeeze the bears out one more time and hope the company is really worth all this trouble. We don’t think it is. 

Gamestop Has Mixed Quarter, No Guidance Is Given 

Gamestop didn’t have a terrible quarter but it was completely lackluster in appearance. The $2.12 billion in earnings was nice to see, it’s up more than 100% on a sequential basis but the gain was seasonally expected, down -3.2% from last year, and missed the consensus by $0.110 billion or 550 basis points. Within the report, there are some good details but there are offset by the bad. The company’s comps increased by 6.5% but were offset by store closures and weak margins. 

Moving down the report, the company’s margins shrank on a YOY basis and missed the consensus by 400 basis points. eCommerce, which increased by 175% YOY, is largely to blame due to higher fees and freight. On the bottom line, the GAAP $1.18 missed by nearly $0.30 while the adjusted $1.34 missed by a dime. What makes this worse is that operating margins also shrank delivering very weak organic EPS growth that was offset by a favorable tax gain. 

Gamestop Business Transformation Is Underway

Gamestop is in the midst of a transformation that aims at making the company more profitable and spur growth. The plans are centered on COVID-related trends including eCommerce which we are not surprised to hear. To that end, the company has hired a new COO whose pedigree includes Google and Amazon. The caveat for investors is that the company declined to give any guidance or even answer questions during the conference call leaving many of the analysts nonplussed. 

The analysts are more bearish on Gamestop than ever before. The consensus hold rating from three months ago has deteriorated into a sell with a price target offering 100% downside to short-sellers. There have been at least major notes out since the release of the earnings putting even more pressure on the price. Wedbush says they still like the turnaround story but lowered their rating to Underweight with a “real value” around $29 per share. Telsey Advisory Group concurs saying the company’s report and plans were nothing they haven’t heard from every other retailer. 

“As for the much anticipated strategic plan, it sounded like every other retailer—invest in technology, build a superior customer experience, expand the product offering, modernize fulfillment operations, and leverage digital assets, including Game Informer (gaming magazine) and PowerUp Rewards (loyalty program)... While we believe the company's 2021 strategic priorities make sense, the elevated share price is divorced of the underlying fundamentals."

The Technical Outlook: Volatility Is The Only Certainty 

With shares down 15% in the premarket and trading just under the 30-day moving average, the technical outlook for Gamestop is not bullish. The caveat is that this stock is not tied to its fundamentals, it is in the hands of speculators and short-sellers who are going to have a big fight today and this week. In our view, it is the short-sellers who will ultimately win but volatility is the only thing we can be certain of. If price action moves below the EMA and the bears get aggressive price action could fall 30% to 50% very easily. If the bulls get frisky and decide to buy this thing up again price action could go to $300 or $350 but only time will tell.