Is It Time To Throw In The Towel On Gamestop?

Key Points

• Gamestop reported a weak quarter giving the market little reason to buy. 
• Short interest is still high and over 20%. 
• A fall below $20 could lead the stock down another 50% to 80%. 

 After two years of volatile meme-induced trading, it may finally be time to throw in the towel on Gamestop (NASDAQ: GME). At least if you’re a bull. The Q3 results and outlook for the next few quarters are not good and have the stock at risk of a major implosion. Another major implosion that is, as if the fall from $100 to $20 wasn’t bad enough for unlucky holders.

Add in the short interest and there is a real concern this stock could fall below the post-meme bottom and return to a more “normalized” valuation in line with the company’s ability to generate profits. That could take shares back down to the $1.50 level on a split-adjusted basis which is another 90% decline. 

Gamestop Has a Tough Quarter 

Gamestop is not without business just the ability to make meaningful and sustained profits. The Q3 revenue came in at $1.19 billion which is good, the bad news is sales are down -8.5% YOY and missed the Marketbeat.com consensus estimate by $0.160 billion or nearly 1300 basis points.

The company tried to offset the miss by highlighting strength in their new and expanded relationships and in collectible sales but neither was enough to offset weakness in the core segments. Software sales, the company’s largest source of revenue, fell by 19%, and a similarly significant decline in hardware sales was reported as well. 

Moving down to the income and earnings, the company also highlighted an improvement in SG&A expenses that was insufficient to offset the revenue decline and subsequent deleveraging in a meaningful way. The adjusted EPS of -$0.31 is not only a loss (obviously), but a larger-than-expected loss and the 7th consecutive quarter of losses for the company.

The balance sheet is still in OK shape, and the company can sustain the business for the foreseeable future, but cash burn and losses can not last forever. Oh yeah, and there are more shares out this year than last year so the earnings weakness is actually worse than it looks. 

It’s Not All Bad News For Gamestop 

To be fair, there was some good news in the Q3 results but it is of the just-dodged-a-bullet variety so not a catalyst for share prices. The news is that contagion from the FTX implosion is limited and the company has little to no exposure to crypto other than its NFT platform. The caveat is that little color was given on the status of the NFT business which was expected to help lift the company out of its malaise. 

The analysts were unimpressed with the Q3 results, as they’ve been all year, and are not supporting the price action now. The single commentary issued in the wake of the release comes from Wedbush which rates the stock a Sell with a newly lowered price target of $5.30 which is the new low. Ironically, the institutions own about 10% of the stock and there has been some buying in Q4. Names on the list include BNP Paribas, State Street, and Vanguard Group which owns most of the institutional holdings. 

The Technical Outlook: Gamestop Is Trading At Key Support 

The price action in Gamestop is holding above support in premarket trading but just barely. The action is sitting at the post-meme lows and at a level that could lower the stock. A move below support at the $20 level would be bearish and could lead to additional selling. If confirmed, the next target for firm support is down near $10 or about 60% below the current action.