GameStop Stock: Seen Lower After Weak Forecast
GameStop (GME) stock rose slightly higher in after-hours trade on Tuesday after the company posted its third-quarter earnings report. It has posted earnings that beat on the earnings per share, but failed to overcome the average analysts’ revenue number. While beating the EPS number is important to wall street and many investors it is not the main metric.
The main metric most investors like to track is the amount of revenue generated by GME for the quarter. Investors weren’t too disappointed with the earnings report which is why the stock rose higher in after-hours slightly by 1.62% to $24.50 per share. The problem is that the stock may trade lower because of the weaker than expected forecast it gave.
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GME Mixed Earnings
The third–quarter earnings report was mixed in fashion. Which is why it doesn’t make sense why the stock traded higher in after-hours trade. GME reported that it had earned $0.49 cents per share compared to analysts only expecting it to report $0.47 cents per share. Even though it was a small beat, it was a beat nonetheless. That may have carried the stock slightly higher in after-hours.
The revenue on the other hand is an entirely different story. GME reported that it had earned $1.96 billion in revenue for the quarter. This number was quite shy of the expected revenue of $1.98 billion. While the miss in revenue was not enough to cause the stock to trade lower, it does foreshadow many problems GME is going to have in the coming year.
For instance, the revenue number reported of $1.96 billion is down 2.8% year over year. A declining revenue number year over year is not something a retail company is aiming for. To appease its investors and reach its goal it must post growth each year. This takes the company one step back, which is a huge setback in the video game retail space. What really hurt earnings was the fact that a few games had underperformed in sales.
Management noted on the conference call that a few of the most popular games underperformed in the last few weeks of October. GME blames this as the most notable reason on why the revenue number was weaker than expected. Still, the reliance of a few video games is not an enticing business model for growth.
Forecast Seen Lower
With the revenue number missing due to lower than expected video game sales during the quarter, one would think that would be enough to cause the stock to trade lower. Well, not even the company posting a weak forecast for the next quarter was enough to cause it to trade lower.
GME stated that during the fourth quarter, which is the holiday quarter, it expects sales in its stores to fall significantly. It is expecting sales at Gamestop stores to fall between 7% to 12%. This is not good for two reasons. The first reason being that analysts were expecting only a 7% fall.
That means a fall further than that would cause panic selling for the stock. Secondly, sales falling is never a good thing if GME ever expects to return growth to its stores. It cited that the lack of games being sold in stores was the sole reason for the fall in revenue. This is because more of its customers will be downloading games to their consoles, instead of buying actual physical copies.
Looking Forward
The main thing to look at with the lower than expected revenue and weaker forecast is how the stock will act over the next few months. The earnings report may have prevented GME from trading down in after-hours, but it won’t succeed in lifting the stock to higher levels.
Taking a look at the chart of the stock, it can be seen that it has dropped by 14% year-to-date. The GME stock has also lost investors over 40% of their investment over the last year. The truth is that the company is expecting weak holiday sales in the coming quarter.
This is highly problematic, because the holiday shopping season is supposed to be the key driver for the whole year. Sales have dropped to $1.96 billion in the reported quarter, which is the third straight time it has fallen this year. The GME stock will see nothing but additional downside until it can markup its forecast.
Disclosure: None.