GameStop Has a Lot to Prove on Wednesday
The market's all but giving up on GameStop (NYSE: GME), but the out-of-favor video game retailer has a great opportunity to win back some semblance of investor trust when it reports fresh financials in a few days. The chain is going to have to prove that it's not just going to fade away as digital and direct distribution disrupt its business model.
GameStop stock is getting pounded. The shares have hit 12-year lows for five consecutive trading days. You have to go all the way back to 2005 to find the last time that the stock was fetching less than Friday's close of $13.50. At least one analyst sees a potential bottom-feeding opportunity here, but by and large, the market seems ready to write GameStop off despite its consistent profitability and its gargantuan dividend.
Image source: GameStop.
Looking for a cheat code
There's naturally going to be a lot riding on the fiscal fourth-quarter results that it will announce shortly after Wednesday's market close. Analysts see a mixed performance. They see revenue rising 7.2% to $3.27 billion, GameStop's headiest top-line growth in more than three years. The rub is that those same Wall Street pros see a profit of $1.97 a share, short of the $2.38 a share it clocked in with a year earlier. It would be the fifth time in the past six quarters that profitability declines.
This is shaping up to be a lot like GameStop's fiscal third quarter, when its operating profit tanked despite positive comps. Store-level growth was coming from collectibles and low-margin hardware products, and not the higher-margin sales of pre-owned games and gear where GameStop would make it rain. GameStop already hinted as such in January with its unsettling holiday sales report, as Switch and Xbox One X console sales helped prop up big-ticket hardware and related software sales, but pre-owned inventory remained challenging.
GameStop's clearly in a funk, and this is the fourth month in a row that the stock is moving lower. GameStop's payouts have been going the other way. The retailer has managed to increase its dividend every year since initiating a distribution policy in 2012, so with the stock at new lows, we're actually talking about an all-time high on its yield. The chunky 11.3% yield doesn't seem sustainable if profits keep going the wrong way.
Investors looking for a silver lining can turn to Loop Capital analyst Anthony Chukumba for inspiration. He put out a bullish note on Wednesday, arguing that the stock's a tempting purchase here ahead of its upcoming earnings report. Chukumba feels that the stock deserves a higher P/E ratio than the mere 4.3 forward earnings multiple it is presently commanding. He's right about that being a substantial discount to its and the market's historical averages, but we'll have to see where those profit outlooks stand after GameStop updates its guidance on Wednesday.
GameStop remains in flux. The categories that it was relying on to deliver incremental growth -- stuff like technology brands and digital sales -- have been pulling back lately. The growing popularity of digital gaming and subscription services is making it less likely that you were at a GameStop last week, and online diversions can't be sold back to GameStop for in-store credit next week. The game's far from over. The sharp sell-off in the stock that has seen its value retreat by more than a third over the past year opens up the possibility for a temporary bounce if the report isn't awful. Getting excited about GameStop beyond that is where things get challenging. You may want to play the game now, but you don't want to hold the controller forever.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short April 2018 $18 calls on GameStop. The Motley Fool has a disclosure policy.
