GameStop’s (NYSE: GME) fundamentals continue to paint a sordid picture of its future. The popular meme stock just can’t catch a break as investors shift their attention toward safer bets. GME stock seems far from being a long-term investment, with an unclear business strategy and dwindling fundamentals. Hence, we are bearish on GME stock.
GameStop lost a substantial $109 million (36 cents per share) during the second quarter of this year. Moreover, its sales dropped to $1.136 billion during the quarter, down 4% from a year ago. Considering the trend over the past several quarters, it should continue to produce horrendous results for the foreseeable future.
It’s the sixth consecutive quarterly loss reported by GameStop, which is reason enough to dump the stock, in our opinion. With a lack of catalysts ahead and a troubling business outlook, it’s tough to feel excited over GME stock.
GameStop Joins Hands with FTX
Last week, GameStop announced a partnership with the crypto trading exchange FTX US. The news created plenty of buzz in the market, with GME stock rising by 12%. The move is in line with its potential bull case, where GameStop is expected to explore new markets and broaden its customer base by engaging crypto customers. This enhances the potential of both market development and customer acquisition.
With the step changes in the video gaming realm and the move towards digital, GME needs new growth drivers to expand its revenue base. The FTX move is exciting and could potentially add value for GameStop in the long run. However, it’s too early in the piece to comment on how the relationship could bear fruit for GME and quantify things from a financial perspective.
Volatility Poses a Threat
Despite dwindling numbers, the meme-stock mania continues to keep GME relevant. However, with the risk-off sentiment in the market, its recent performance has been remarkably weak. The stock has lost over 35% of its value this year and continues to experience incredible volatility.
Moreover, after the 4-for-1 stock split, it was expected that the stock would become more attractive to investors. However, investors haven’t shown particular interest in GME after that development.
GME’s Meme Investor Support
As discussed earlier, GME hasn’t been able to garner much attention in the current market scenario. Its stock price was trading at $120 per share (split adjusted) in its heyday, but since then has taken a massive haircut. With the markets off to their worst in years, I don’t expect a stock like GameStop to be of much value to investors for the foreseeable future. However, it is imperative to understand that the meme-stock mania is here to stay.
Though the movement seems to have quieted down at this time, we believe that the phenomenon will continue to play a part in the equity market over the long term. With the proliferation of online applications and websites, it’s easy for novice millennial investors to place their bets. Hence, taking stock of the moon through the help of social media will become a common occurrence.
GameStop Needs a Strategy Revamp
Although the company has somehow managed to survive amid strong competition, its long-term case remains under doubt. The worrying part is that it doesn’t have any competitive advantage to sustain its business over the long run. Moreover, the growth of the digital games market has further aggravated its challenges.
Gamestop has tried to counter these stumbling blocks by chopping and changing its business model. It focused on enhancing its online presence instead of relying on physical stores and also partnered with multiple manufacturers to increase options for customers online. However, it seems like it’s too little too late at this point. The need for an intermediary like GameStop is fading fast in the gaming world.
What is the Prediction for GME Stock?
Turning to Wall Street, GME stock maintains a Moderate Sell consensus rating based on just one Sell rating assigned over the past three months.
However, the Sell rating didn’t come with a price target. GME stock’s most recent price target came over three months ago, at $27.50.
Conclusion: GameStop Has Been a Disappointment
Gamestop has been a massive disappointment. So far, it has managed to survive somehow despite the immense competition in its niche. Moreover, it is looking to stay relevant by partnering with unrelated businesses such as FTX to usher in a new growth phase. The partnership with FTX did create some noise in the market, leading to a rally. However, the rally soon faded away.
The stiff competition in the space suggests that GME needs a major overhaul. It lacks the competitive advantage to attract more investors, especially considering the meteoric rise of downloadable games. The change in business model towards e-commerce could potentially ignite the lost fire, but it’s probably not going to be enough. Therefore, GameStop must offer something unique to its customers to make a long-term impact.
