GameStop Corp. (GME), a specialty retailer that provides games and entertainment products via its stores and e-commerce platforms, is expected to release the fiscal 2024 first-quarter earnings report on June 11, 2024, after the market closes. Analysts expect revenue for the quarter (ended May 4, 2024) to decrease 19.6% year-over-year to $995.30 million.

Similarly, Street expects the video game retailer to incur a loss per share of $0.09 for the to-be-reported quarter. Also, GME missed the consensus revenue estimates in three of the trailing four quarters, which is disappointing.

On a preliminary basis for the first quarter, GameStop expects net sales to be in the range of $872 million to $892 million, compared to $1.237 billion in the previous year’s quarter that ended April 29, 2023. This significant decline in sales reflects the ongoing challenges in the gaming retail sector and shifts in consumer behavior impacting the company.

Further, GME’s net loss is anticipated to be in the range of $27 million to $37 million. The company has been struggling to compete with e-commerce giants, including Amazon.com, Inc. (AMZN) and eBay Inc. (EBAY), as well as digital storefronts from console makers such as Nintendo Co. Ltd. (NTDOY) and Sony Group Corp. (SONY).

As of May 4, 2024, the company’s cash, cash equivalents and marketable securities are expected to be $1.073-$1.093 billion versus $1.310 billion at the close of the prior year’s quarter.

Besides, GameStop announced it entered an agreement with investment bank Jefferies to list up to 45 million shares of its common stock, an offering that could expand the company’s outstanding shares by approximately 15%, posing a threat of dilution.

Despite its bleak fundamentals, shares of GME have surged 179.5% over the past month and 213.7% over the past six months to close the last trading session at $46.55. The stock rally is driven by market speculation, primarily due to recent social media posts by a renowned meme trader, Keith Gill, also called “Roaring Kitty.”

Here’s what could influence GME’s performance in the upcoming months:

Weak Financial Performance 

GME’s net sales declined 19.4% year-over-year to $1.79 billion for the fourth quarter that ended February 3, 2024. Net sales from the Hardware and accessories segment decreased 11.9% year-over-year, and net sales from the Software and Collectibles segment were down 30.6% and 25.4% year-over-year, respectively.

In addition, GameStop’s gross profit decreased 16.1% from the prior year’s quarter to $281.80 million. Net cash outflows from operating activities came in at $11 million versus net cash inflows of $338.20 million in the previous year’s period. The company’s cash and cash equivalents were $921.70 million as of February 3, 2024, compared to $1.14 billion as of January 28, 2023.

Disappointing Historical Growth

Over the past five years, GME’s revenue has declined at a CAGR of 8.6%. Its EBITDA has decreased at a CAGR of 43.6% over the same timeframe. Further, the company’s total assets have shrunk at a CAGR of 7.7% over the same period, and its normalized net income has decreased at a 40.9% CAGR.

Unfavorable Analyst Estimates

Analysts expect GME’s revenue to decrease 10.4% year-over-year to $1.04 billion for the second quarter ending July 2024. The company is expected to report a loss per share of $0.04 for the ongoing quarter. For the fiscal year ending January 2025, Street expects its revenue and EPS to decline 10% and 83.3% year-over-year to $4.74 billion and $0.01, respectively.

Furthermore, the retailer’s revenue for the fiscal year 2026 is anticipated to decrease by 3.6% year-over-year to $4.57 billion.

Elevated Valuation

In terms of forward non-GAAP P/E, GME is trading at 4,655x, 41% significantly higher than the industry average of 16.02x. Its forward EV/Sales multiple of 3.32 is 169.3% higher than the industry average of 1.23. Likewise, the stock’s forward Price/Sales of 3.45x is 288.8% higher than the industry average of 0.89x.

Also, the stock’s trailing-12-month EV/EBITDA and Price/Book of 642.90x and 10.63x are considerably higher than the industry averages of 10.70x and 2.15x, respectively.

Decelerating Profitability

GME’s trailing-12-month gross profit margin of 24.54% is 33% lower than the industry average of 36.63%. Similarly, its trailing-12-month EBITDA margin of 0.46% is 95.8% lower than the industry average of 11.13%. The stock’s trailing-12-month net income margin of 0.13% is unfavorably compared to the 4.71% industry average.

Additionally, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 0.50%, negative 1.02%, and 0.25% are lower than the industry averages of 11.61%, 6.19%, and 4.18%, respectively. Its trailing-12-month levered FCF margin of negative 4.09% compares to the 5.44% industry average.

POWR Ratings Reflect Uncertainty

GME’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has an F grade for Stability. GME’s 24-month beta of 1.50 justifies the Stability grade. Also, it has a D grade for Value, consistent with its extremely elevated valuation.

Further, the stock has a D grade for Sentiment, in sync with deteriorating financial performance and disappointing analyst expectations.

Within the Specialty Retailers industry, GME is ranked #38 out of 41 stocks.

Beyond what I have stated above, we have also given GME grades for Quality, Growth, and Momentum. Get all GME’s POWR Ratings here.

Bottom Line  

GME’s recently unveiled preliminary results for the first quarter of fiscal 2024 highlighted a turbulent period for the videogame retailer characterized by a notable decline in sales and massive losses. The company has been grappling with a significant decline in demand for physical games and heightened competition from e-commerce giants.

Keith Gill, also known as Roaring Kitty, reignited the craze for GameStop shares after he began posting on social media in May. Gill’s recent social media posts sparked a meme-stock rally that caused a considerable surge in GME shares, despite its weak fundamentals.

Given GME’s poor financials, stretched valuation, decelerating profitability, and dim growth prospects, it could be wise to avoid investing in this stock.

Stocks to Consider Instead of GameStop Corp. (GME)

Given its uncertain short-term prospects, the odds of GME outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Specialty Retailers industry instead:

Betterware de Mexico, S.A.B. de C.V. (BWMX)

Next plc (NXGPY)

Upbound Group Inc. (UPBD)

To explore more A and B-rated retail stocks, click here.

What To Do Next? 

Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:

10 Stocks to SELL NOW! > 

GME shares fell $4.32 (-9.28%) in premarket trading Friday. Year-to-date, GME has gained 165.54%, versus a 12.84% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

More...