GameStop Earnings Preview

The pre-eminent meme stock reports tomorrow, but will it be like Bed Bath and Beyond, or can something happen to turn it around?
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Is the meme interest over?

GameStop shares are trading below the return rate of the S&P 500, meaning that after all the ups and downs over the last eight months, it's down a quarter of its value since the start of the year.

To make matters a little more difficult for traders, analysts have been steering away from the stock. Only three analysts are willing to try to figure out what GameStop will report, so there is an increased chance of the results missing or exceeding expectations.

GameStop is expected to report a loss of -$0.42 per share, down from the -$0.19 last year. Revenue is also expected to be lower at $1.3B. Despite the disappointing earnings outlook, short interest has been declining of late. It was the prospect of a short squeeze that drove the price to prominence, but now just 25% of its market cap is short.

The bottom line

The issue for the company is whether it managed to take advantage of the meme rally to reposition itself for further growth. The stock was shorted for a good reason; and the increasing losses suggest that reason persists. The company maintains $1.0B in liquidity while averaging between $250-$300M in cash burn per quarter. The main question on investors' minds then is, can the company move online and return to the black within the next year?

The focus for GameStop's earnings is likely to be on guidance around the digital transformation, plus costs relating to headcount adjustment. The firm has recently been closing locations and reducing the number of employees to get operating costs down. But unless online sales start to meaningfully improve, it might be just prolonging the inevitable. Therefore, traders might pay the closest attention to the hardware sales to software sales ratio.

Stock at 3-month low

GameStop shares remain bearish below both the 200-day and 50-day averages with the most recent “death-cross” sending the price to a 3-month low at $27.00. This has been the first time the moving averages met since December ’21.

So long as the stock remains below the SMAs, $20.00 is the next key support above the round levels subsequently down to $15. In the event the share price accelerates, $30 is a round number short-term resistance. Above the SMAs, $40 and the high of $48 are of importance.

Key takeaways

The GameStop share price has lost a fourth of its value over the past eight months, and analysts are steering away from it. Despite the disappointing earnings outlook, short interest has been declining of late. This is because now only 25% of its market cap is short.

The company has a lot of cash, but they're still burning through it on average $250-300M per quarter. The main question on investors' minds is whether the company can move online and turn a profit within the next year. GameStop is going through a rough patch, with declining sales, store closures, and layoffs. It's hard to see a way out of this hole without online sales increasing significantly.