Video game retailer GameStop (GME) has experienced bullish momentum this year, as one can see in the chart below. And the company is set to report its Fiscal Q3 earnings on December 10th. While the stock has often traded as a “meme stock,” the hype has enabled the company to raise billions through equity sales, making it cash-rich despite ongoing declines in its revenue. I believe GameStop has a chance to report a profitable quarter and maintain its current momentum. Therefore, I am cautiously bullish on GME stock going into earnings.
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Keeping The Momentum Going
A more favorable outlook for the video-game retailer ahead of earnings can be attributed to the bullish momentum that has occurred since the return of famed social media influencer Keith Gill, also known as “Roaring Kitty.” GME stock is up more than 60% this year, significantly outperforming the S&P 500 (SPY). Gill was instrumental in introducing the GameStop investment thesis to hundreds of thousands of retail investors back in 2020, which eventually led to the massive short squeezes of 2021.
This spring, after a nearly three-year absence, Gill returned to social media and announced a multi-million-dollar bet on GME stock. His involvement helped send the stock soaring by triple digits in only a few weeks. GameStop’s management seized the opportunity to capitalize on the hype generated by Roaring Kitty’s return.
In May, the company sold 45 million shares, raising $933 million in cash. After another rally a few weeks later, GameStop sold an additional 75 million shares in June, raising $2.10 billion. With these new funds, combined with the company’s previous cash reserves, GameStop now holds about $4.2 billion in cash, equivalents, and short-term investments.
Strong Momentum in GME Stock
To understand the bullish momentum GameStop is currently experiencing, we can look at both short- and long-term technical indicators, which are showing strong bullish signals. First, GameStop’s shares are trading above their simple moving averages (SMA) from the 20-day to the 200-day, indicating that both short- and long-term trends remain bullish. This suggests strong buying momentum and the potential for continued growth.
However, it’s worth noting that the rally triggered by Roaring Kitty’s return may have distorted the average share price over the last 200 days. That said, when we examine the exponential moving averages (EMA), which are more sensitive to price fluctuations, we see the same bullish trend across the 20-day to 200-day periods.
What to Expect from GameStop’s Q3 Earnings
While GME stock has been riding an upward trend heading into its Fiscal Q3 earnings, it’s still highly uncertain how the stock will perform this quarter. Historically, GameStop’s share price has moved independently of its business fundamentals.
Since GameStop became a “meme stock” in 2021, many analysts have abandoned coverage of the company. As a result, the consensus on both the top and bottom lines for Fiscal Q3 comes from just two analysts. The numbers to beat are a loss per share of -$0.03 and revenues of $887.68 million, which would represent a 17% annual decline in sales. Those are pretty low bars for GameStop to jump.
Given that GameStop’s management strategy lacks detailed execution, namely, (1) establishing omnichannel retail excellence, (2) achieving profitability, and (3) leveraging brand equity for growth, it’s clear that the company is bracing for revenue declines. As a result, the primary focus is on achieving breakeven profitability, which can only be accomplished by continually improving its cost structure. Regardless of whether the year-over-year sales decline is larger or smaller than the expected 17%, if GameStop can reduce its cost of goods sold at a rate greater than the revenue decline, and reduce operating expenses at a higher rate than in previous quarters, it could be a decent quarter. In this scenario, GameStop could be on track to post a profitable year for the second consecutive year.
Is GameStop a Good Buy?
At TipRanks, only one analyst currently covers GME stock: Michael Pachter of Wedbush. Pachter has rated the stock a Sell and has set a price target of $10, down from his previous estimate of $11, which he revised on November 9 of this year.
Pachter suggests that the best course of action for GameStop would be to close all of its stores and transition to an online model, operating more like a bank. He argues that the company lacks a clear strategy from management to offset the impact of store closures, which have been ongoing for the past few quarters.
Conclusion
Although GameStop remains more of a speculative play than a traditional investment, I believe there’s a good chance the company will report a profitable quarter, even if sales decline by nearly 20% compared to the same period last year. As a result, I expect the bullish momentum to persist, and I’m adopting a contrarian bullish stance. The management team has suggested that achieving breakeven profitability is sufficient for now. With around $4.2 billion in cash and no significant debt, I believe it’s only a matter of time before GameStop announces significant growth plans beyond its core business. If such an announcement happens in Fiscal Q3, it could serve as a major catalyst for further rallies in the share price.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
