GameStop’s unanswered questions as earnings report nears

It’s been nearly six months since GameStop kicked off a broader revolution among retail investors that’s sent shares of out-of-favor companies soaring. But investors are still mostly in the dark regarding efforts to turn the videogame retailer around.

After playing second fiddle to the likes of AMC Entertainment Holdings, Clover Health Investments, and BlackBerry, the original meme stock is back in the spotlight. GameStop is set to release its second quarterly earnings report since January’s mayhem on Wednesday after the market close. In the time since, the videogame retailer has announced several new hires with e-commerce and customer care expertise and posted a hiring call for a project involving non-fungible tokens, or NFTs.

What GameStop hasn’t done is detail efforts to adapt to a videogame business that’s rapidly shifting from physical shelves to direct downloads. It also hasn’t provided numbers for what its revamped e-commerce efforts will cost. Of course, the company still hasn’t announced its next chief executive nor chief financial officer, though Chewy co-founder Ryan Cohen will become chairman of the board after its annual meeting Wednesday afternoon. The company could give an update during its earnings call, but keep in mind executives did not take questions from analysts during the March call.

Wall Street’s consensus estimates for the fiscal first quarter call for a net loss of 82 cents a share and sales of $1.16 billion. While Wedbush analyst Michael Pachter thinks industry data from NPD suggests GameStop’s fiscal first-quarter sales could disappoint, he writes that the bullish views of retail investors and the company’s long-awaited transformation strategy seem to matter more for the stock right now than the fundamentals of the business.

GameStop stock is up an absurd 5,948% from a year ago to a recent $300. Back then, the stock was viewed by investors like Scion Asset Management’s Michael Burry, of The Big Short fame, as a value play. But Burry exited his GameStop stake in the fourth quarter of 2020 well before shares exploded amid a cocktail of high short interest, aggressive call options, and retail trader enthusiasm. Burry called such events “unnatural, insane, and dangerous.”

“As long as retail investors largely remain enthusiastic about GameStop’s prospects, however, the major question marks don’t matter much in terms of share price action,” Pachter writes.

Investors tempted by such silly factors moving meme stocks should be careful. The music will eventually stop, but short sellers betting on a price decline face infinite downside. S3 Partners managing director Ihor Dusaniwsky tells Financial News sister title Barron’s he still sees high potential for a short squeeze. He estimates short interest at 10.86 million shares shorted, or 19% of shares available for trading.

Recent options market activity implies a post-earnings move — up or down — of between 20% and 25%, according to Bloomberg and Barron’s calculations. That may say more about meme stock volatility than it does about the coming report. After GameStop’s fiscal fourth-quarter results missed estimates, the stock initially tanked from $181.75 on March 23 to $120.34 on March 24. But the stock rebounded and hasn’t looked back in the months since.

Pachter, who is among the more optimistic analysts still covering the stock, assigns GameStop a $39 price target. The stock closed up 1.4% to $304.05 on Tuesday.

While he calls the company well-positioned to benefit from new videogame consoles and thinks it can be profitable in fiscal year 2021, he says the share price has been driven by the short squeeze and retail investor enthusiasm to levels that are disconnected from the fundamentals.

Looking ahead, GameStop will need to prove it has a historic turnaround up its sleeve. In the meantime, investors would be wise to enjoy the meme stock fireworks from a safe distance.

This article was first published by Barron’s

Write to Connor Smith at [email protected]

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