Popular video-gaming retailer GameStop Corp. (NYSE:GME), which specializes in the sales of both new and second-hand merchandise, finds itself at a unique crossroad.
On one hand, renowned investment research firms like Oppenheimer and Wedbush reaffirmed their respective “outperform” ratings for GME stock, citing favorable developments within the video game industry.
In contrast, however, is the bear argument led by Zacks Equity Research, which maintains a “sell” recommendation for GME.
With GameStop earnings for the first quarter of fiscal year 2016 to be released shortly on May 28, which one of these assertions is the most accurate?
The bullish argument for GME stock begins with a concession: Combined sales of gaming hardware and software have declined 1% in the first quarter, aligning with a generally disappointing trend in domestic business activity.
However, revenue of next-generation merchandise increased by 81%, and both Oppenheimer and Wedbush believe that the bulk of GameStop earnings potential will be largely driven by next-gen gaming. In addition, the latter forecasts that GME should hit the higher end of the retailer’s earnings per share guidance thanks to share buybacks.
Not everyone is enthused by GME’s prospective performance, however. Combined with weakened sales of prior generation gaming devices, GME stock may suffer in the markets due to the bearish implications of currency dynamics.
GameStop’s management team had previously estimated that such unfavorable shifts would hurt top-line sales by $300 to $400 million, and that EPS would be negatively impacted to the tune of 6 to 9 cents for Q1 FY2016. Also, the ramp-up in volume for bearish put options indicate that traders are openly betting for GME stock to move lower after GameStop earnings results are released.
Ultimately, the evidence for GME suggests that the bears have an overall better argument. Between Q1 FY2012 and Q3 FY2014, GameStop earnings either met or exceeded Wall Street expectations, an enviable 10-hit consecutive winning streak. However, over the next five GameStop earnings releases, three missed their forecast targets: Q4 FY2014, and Q3 and Q4 of FY2015.
Furthermore, the recent performance of GME stock between the time of earnings releases has become much more volatile than in previous time periods. Between Q1 FY2013 and Q2 FY2014, the average quarter-to-quarter performance of GME stock was 17.75%. From Q3 FY2014 onwards, however, the average skidded dramatically to -3.21%, indicative of declining investor confidence in the company’s ability to compete in the cutthroat gaming industry.
The last indictment for GME stock comes in the form of technical analysis. After shares bottomed in the summer months of 2012, GME rebounded sharply, hitting multi-year highs at around $55 by November of 2013.
Since then, however, the bulls have failed to recapture the magic, with GME stock meandering inside a bearish trend channel. Based on post-GameStop earnings performances, the odds are against GME pulling a surprise rally in the markets.
Bottom Line: There are many elements that are supportive of GameStop as a long-term investment. But in the nearer time frame, the evidence suggests that GME will get pushed down.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
