GameStop Shares Surge On Surprise Profit

Key Points

• GameStop surged on surprise profits, but the bears are already capping gains. 
• Results are good but driven by an unsustainable inventory reduction. 
• Caution chasing this stock higher. 

GameStop NYSE: GME is an interesting and exciting market to watch, but it is not a market for most investors to dabble with. The only thing that can be said is that volatility will reign supreme because the bulls and the bears have strong feelings about where its price should be. The analyst's support shows that average investors should avoid (except with specifically allocated speculation dollars). This stock doesn’t have any. The last to come out with any commentary was Wedbush and the end of last year, and they rate it as Reduce with a price target more than 75% below the newly elevated price action. 

Another is the short interest. The short interest is largely why the stock rose 50% at the open following the Q4 report, but they aren’t running scared, far from it. Fintel.io reports short interest was amazingly high at 21%, and the off-exchange short volume is well above 50%, showing a deep commitment level. The bulls may have advanced now, but they may not get much higher when the bears reposition, and it looks like they are doing that very thing right now.  

The institutions, you say? Yes, they bought an astounding $1 billion worth of the stock in Q4 but didn’t buy much in Q1. Their new holdings are still down or nearing break-even, with the shares up about 30%, and you have to ask yourself, what will they do now? Start buying again with the economy on the brink of collapse. That may be a stretch. Think about all the daily layoffs and how those will affect spending on games and intangibles like NFTs. GameStop had a good quarter, but how long can it last?

GameStop Posts Surprise Profit, Don’t Expect More 

GameStop posted a surprise profit in Q4, but the news isn’t great. The company’s revenue of $2.23 billion is down on a YOY basis, and profitability is 100% tied to a reduction in inventory. The inventory reduction is sound, but a 25% decline can’t be sustained long, and the company still have merchandise to sell. The alarming comparison is that the $232 million worth of inventory reduction offset a loss of $147.5 last year for a profit of $48.2 million. That’s a difference of only $195 million which means on an inventory-adjusted basis, this year's operating results worsened despite a 350 basis point improvement in SG&A expense. 

The good news is that GameStop still has about $1.4 billion in cash and very little debt. This should sustain operations for the next few years while the bulls and bears fight this thing to the death. Investors can sit back and watch the action between then and now while focusing on better bets. 

The Technical Outlook: GameStop Is In A Downtrend 

GameStop shares surged more than 50% at the open but are still down trending. The size of the opening surge is a testament to the volatile nature of the stock, as it only moved up to the 150-day EMA. This level has been a critical point of resistance and selling since the meme-stock correction took hold in 2021. The way it looks now, the short-sellers are out in force and capping gains at this level. Traders should expect downward pressure to build and keep this thing moving sideways, if not down to retest support near $16.