GameStop faces 'near insurmountable barrier' in its return to growth, says Wedbush

By James Rogers

The videogame retailer and original meme stock reports second-quarter results after market close on Sept. 10

GameStop Corp., which reports second-quarter results after market close on Sept. 10, continues to face a slew of challenges, according to analyst firm Wedbush.

"We expect an in-line quarter for GameStop with a modest sequential improvement to its profit, driven by increased interest income following two share offerings (for a total of 120 million shares) that netted the company roughly $3 billion in cash, or around $7 per share," wrote Wedbush analyst Michael Pachter, in a note released Friday.

However, GameStop (GME) "continues to face a near insurmountable barrier to its planned return to growth," the analyst added. This includes the ongoing shift of game sales from physical to digital, a decline in game sales as microtransactions proliferate, the growth of subscription services, and an ongoing hardware sales decline as streaming services proliferate, the analyst added. Pachter also cited "the company's total lack of any strategy to enter new categories with growth potential."

Related: GameStop has ended a $250 million credit facility. The stock is on pace for its biggest gain since June.

Microtransactions are in-game purchases made by gamers. GameStop has not yet responded to a request for comment from MarketWatch.

Set against this backdrop, Wedbush maintained its underperform rating and $11 price target for GameStop. Of two analysts surveyed by FactSet, one has a hold rating and one has a sell rating for GameStop.

Analysts surveyed by FactSet are looking for GameStop to report a loss of 9 cents a share and sales of $896 million.

Related: Little-known Florida couple with GameStop winnings continues to build stake in JetBlue

Wedbush expects GameStop to report second-quarter net sales of $900 million and a loss of 1 cent a share. Industry sales were roughly flat year-over-year in the second quarter, with hardware sales declines offset by a decent software release lineup, according to Pachter. "GameStop should benefit from stable industry sales in the quarter, but the ongoing mix shift towards digital likely led to underperformance in the quarter," he added. "The software release slate in Q2 was solid, with Electronic Arts releasing College Football 25 and the EA Sports MVP Bundle (which included both College Football and Madden), Nintendo releasing Paper Mario: The Thousand-Year Door, and Bandai Namco releasing its Shadow of the Erdtree expansion for Elden Ring."

Wedbush does not expect GameStop to provide detailed financial guidance for fiscal year 2024. The company has also not held a conference call in conjunction with its earnings report since March 2023 and its press release announcing the date for its second-quarter results made no reference to a call. "Management continues to shun investor interaction, forgoing the customary conference call and Q&A session that typically accompanies earnings releases," wrote Pachter. "The company has not provided formal sales or earnings guidance since 2019, and does not help investors understand the pace of store closures or the performance of new revenue categories."

Nonetheless, this has been an eventful year for the videogame retailer and original meme stock. Last month GameStop said it had voluntarily terminated a $250 million credit agreement that the company entered in November 2021. In June, GameStop said it raised $2.14 billion in a share sale, noting that it may use the proceeds for mergers and acquisitions.

Related: Why Roaring Kitty is a GameStop 'true believer'

Earlier this year, the return of influential trader Keith Gill, also known as "Roaring Kitty," sent shares of GameStop and AMC Entertainment Holdings Inc. (AMC) skyrocketing. Both stocks featured prominently in the 2021 meme-stock frenzy, in which Gill was an influential figure.

In June, a Reddit post from an account associated with Gill appeared to show him holding a big stake in GameStop. On June 7, Gill hosted his first YouTube livestream in three years, an event that attracted widespread attention. Gill used the livestream to discuss what he described as an "overemphasis" on GameStop's legacy business.

"They are in the transformation stage," he said, before saying of GameStop Chief Executive Ryan Cohen: "I believe this guy - he might be able to do it."

Related: GameStop's stock falls following downbeat earnings and plan to sell more shares

During GameStop's annual shareholder meeting in June Cohen said he is focused on creating a "smaller network of stores." He also noted that the company's strong balance sheet provides a strategic advantage.

GameStop shares are up 36.5% in 2024, outpacing the S&P 500 index's SPX gain of 13.4%.

Ciara Linnane contributed.

-James Rogers

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09-06-24 1719ET

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