GameStop Stock Downtrend Is Intact: The End Game Draws Near

Key Points

• GameStop had a rough and tumble quarter, missing estimates on the top and bottom lines. 
• The company continues to burn cash and is not expected to stop in F2024.
• Analysts peg the stock at sell, institutional interest is low, and short-sellers are out in force, so new lows are likely. 

Shares of GameStop NYSE: GME have been trending lower ever since the meme stock frenzy first spiked, and the downtrend is intact. The company continues to bleed business and cash, putting it in a downward spiral, and investors should flee. The stock is still tradable, but bullish traders beware; one day’s gains will likely turn into losses tomorrow, next week, and next year. 

As appealing as the business model is, it relies on a niche, after-market business that has yet to produce sustainable growth or profitability and probably never will. If you are wondering what the end-game for this stock is, the most likely scenario is to revert to the pre-meme price points below $5. 

No Game In GameStop Q4 Results

GameStop had a weak quarter in Q4, missing the Marketbeat.com consensus estimates on the top and bottom lines. The company brought in $1.79 billion in net revenue for a decline of 19.7% YOY that missed the consensus by 1200 basis points as clients cut back on hardware, software, and collectibles. 

Hardware posted the smallest decline, 12% YOY, led by a 25% decline in collectibles and a 30% contraction in software. Sales are impacted by inflation and interest rates, which are pinching consumer discretionary dollars, and there is the AI factor to consider. 

With AI on the rise and expected to be embedded into games and consoles, the gaming market may sit back and wait for next-gen equipment rather than double down on the old stuff. As it is, the next-gen consoles aren’t expected to be launched for a few more years. However, tech leaders Microsoft NASDAQ: MSFT and Sony NYSE: SONY are expected to release intermediate upgrades in the interim. 

Margin is a brighter spot in the report but insufficient to alter the outlook. The company improved the margin sequentially and turned cash flow positive for the quarter, but the full-year results and impact on the balance sheet are less than savory. The company's cash flow was negative for the year, resulting in a 20% decline in cash and equivalents despite the 7.3% decline in inventory. Inventory stands at $632.5 million and continues to be a risk; the longer it sits, the less appealing and harder to sell it is. 

Earnings are positive but, again, insufficient to alter the outlook. The quarterly profit is insufficient to offset the annual loss, the company’s final and best quarter of the year. With the next three quarters expected to show sustained contraction, this situation will not change. The likely scenario is that GameStop will continue to bleed cash as it slowly circles the drain, posting another loss in F2025. The company offered no commentary or guidance or held a conference call. 

Don’t Buy GameStop Until Serious Money Gets Involved

Aside from CEO and Chairman Ryan Cohen, serious money is avoiding GameStop. Wedbush is the only firm to offer a rating, and they have the stock pegged at Sell with a price target of $5.60. That’s 65% below the current price action and a likely target. Institutional interest is near 30%, but don’t read too much into that. It’s a small amount for a company with promise. There is also the short interest to consider. Short interest was near 20% at the last report and may increase now that price action is tracking for another fresh low. 

The price action is not good for the bulls. This market is in a protracted downtrend, and the trend was confirmed following the release. The 18% price implosion shows strong resistance at the 150-day and 30-day EMAs, aligning with downward price action. The stock is still above critical support at the recent low, so there is some hope. If the market can sustain that level, it may not move any lower. However, if this market falls below $12.18, it may quickly hit the $5 level.