The meme stock frenzy seems to have fizzled out with GameStop (GME). The percentage of shares held in short interest has fallen to the lowest level in five years. With the shorts gone, despite some short-term spikes, the odds are against a repeat of past rallies fueled by a short squeeze. In a world where fundamentals drive share price, GameStop’s significant decline in revenue, exacerbated by the ongoing closure of stores, is a cause for concern. With no upside catalyst in sight, this decline suggests the shares are significantly overpriced.
Considering its current financial state and weak fundamentals, GameStop appears to be a risky choice for investors, making it advisable to steer clear of this stock.
GameStop’s Failing Business Model
GameStop Corp. offers various products, from gaming platforms, accessories, and digital content to collectibles distributed globally through physical stores and e-commerce platforms. It’s also involved in digital asset wallet services and NFT marketplace activities.
The company faces financial instability due to shifts in consumer behavior. Digital game streaming and downloads, preferred by game-playing youth, eclipse physical console game sales, impacting GameStop’s sales. The change is evident in the company’s most recent quarterly report, showing a $32.3 million loss, with sales down roughly 30% from the same period in the prior year.
Additionally, GameStop failed to hold an earnings conference call after its quarterly financial results release while selling 75 million shares in an at-the-market offering. This led to potential concerns about share-value dilution with no guidance on the firm’s future direction.
GameStop’s Recent Financial Results
The company recently reported its financial results for the first quarter. Net sales landed at $0.882 billion, a decrease from the prior year’s first quarter of $1.237 billion. Selling, General, and Administrative expenses (SG&A) for the quarter reached $295.1 million, representing 33.5% of net sales. This is an increase compared to the previous year’s first quarter, with SG&A expenses at 27.9% of net sales. The net loss for this first quarter was $32.3 million, an improvement on the prior year’s first quarter net loss of $50.5 million. Earnings per share (EPS) of -$0.11 fell short of analysts’ expectations of -$0.09.
Closing figures for the quarter showed cash, cash equivalents, and marketable securities totaling $1.083 billion.
On June 7, 2024, the company announced a prospectus supplement filed with the U.S. Securities and Exchange Commission to offer and sell a maximum of 75,000,000 shares of common stock through the ATM Program. This program has raised gross proceeds of $2.137 billion. The earnings from this ATM Program are earmarked for general corporate purposes, potentially including acquisitions and investments.
What Is the Price Target for GME Stock?
The company looked set for the dust-bin of corporate history until Roaring Kitty and the Diamond Hands crew took advantage of the massive short interest on the stock, creating the ‘meme stock’ craze. In the volatile ride that followed, management was able to leverage spikes in price to raise significant capital, keeping the firm alive as the value of the shares dropped over 53% from its meme-fueled highs. However, the current P/E ratio of 276.4x suggests the share price is still being inflated by speculative mania.
At this point in the saga, Wall Street coverage of the company is thin. Based on the most recent recommendation and price target, GameStop is rated a Moderate Sell. The average price target for GME stock is $11.00, representing a potential -50.89% downside from current levels.
Bottom Line on GME
GameStop’s downward spiral seems to be continuing. The company’s shift towards digital platforms and services hasn’t staved off a significant revenue decline and increasing losses, as seen in its recent quarterly report. With no future guidance given to investors and ongoing dilution of share value, the company appears to be a high-risk, low-reward choice for investors. Steering clear of GME stock seems a prudent choice at present.
