Texas, Grapevine-based GameStop Corp. (GME) offers games and entertainment products through its e-commerce platforms and various stores in the United States, Canada, Australia, and Europe. The company markets and sells new and pre-owned gaming platforms, accessories, new and pre-owned gaming software, digital currency, and full-game downloads.
GME operates more than 4,573 stores and e-commerce sites under GameStop, EB Games, and Micromania. The company also operates nearly 50 pop culture-themed stores under the Zing Pop Culture brand.
GME dominated headlines when the stock witnessed a massive short squeeze rally in early 2021. And the stock is currently trading nearly 66.4% below its high of $120.75, which it hit on January 25, 2021.
However, since the beginning of this year, investors have stayed away from meme stocks, including GME. Amid concerns over high inflation, the Federal Reserve’s aggressive interest rate hikes, and an economic slowdown, GME witnessed a massive sell-off.
In May, the company launched its digital asset wallet to grow gamers and others to store, send, receive, and use cryptocurrencies and non-fungible tokens (NFTs) across their web browsers.
Unfortunately, GME’s timing was completely off as the cryptocurrency and NFT world is going through a significant downtrend this year
Here is what I think could influence GME’s performance in the upcoming months:
Poor Financials
For its fiscal 2022 first quarter ended April 30, 2022, GME’s gross profit decreased 9.6% year-over-year to $298.50 million. Its adjusted selling, general, and administrative expenses increased 28.6% from the year-ago value to $452.20 million. The company’s adjusted operating loss amounted to $153.70 million, widened by 611.6% year-over-year.
GME’s adjusted EBITDA loss stood at $125.50 million, compared to a $700,000 loss reported in the prior-year period. In addition, the company's adjusted net loss and loss per share came in at $157.90 million and $2.08, worsening 437.1% and 362.2% year-over-year, respectively.
Weak Growth Prospects
Analysts expect loss per share to widen 100% year-over-year to $0.38 in its fiscal 2022 second quarter (ended July 2022). The consensus loss per share estimate for the ongoing year (ending January 2023) is expected to come at $0.92.
Furthermore, Street expects GME’s loss per share to worsen by 48.2% per annum over the next five years. It’s no surprise that the company has missed the consensus EPS estimates in each of the trailing four quarters.
Frothy Valuation
In terms of forward EV/Sales, GME’s 1.84x is 54.8% higher than the 58.8x industry average. Likewise, the stock’s 1.90x forward Price/Sales is 96.1% higher than the 0.97x industry average.
Low Profitability
GME’s trailing-12-month gross profit margin of 21.5% is 41.3% lower than the industry average of 36.67%. Its trailing-12-month CAPEX/Sales of 0.95% is 67.3% lower than the industry average of 2.91%. Its trailing-12-month EBITDA margin of negative 5.62% compares with the 11.52% industry average.
In addition, GME’s trailing-12-month ROTC and ROTA of negative 14.31% and 15.11% compare with the industry averages of 7.13% and 5.41%, respectively.
POWR Ratings Reflect Bleak Prospects
GME's overall F rating translates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
GME has an F grade for Growth and Sentiment, consistent with its bleak revenue and earnings growth estimates. In addition, it has an F grade for Value, in sync with its higher-than-industry valuation multiples.
GME is ranked #45 out of 45 stocks in the Specialty Retailers industry.
Beyond what I have stated above, we have also given GME grades for Value, Quality, and Momentum. Get all the GME ratings here.
Bottom Line
Investors have been bearish about GME due to its deteriorating financials and declining growth. Moreover, the company’s near-term prospects look uncertain amid a significant collapse in cryptocurrency aggravated by recent macroeconomic headwinds.
Given its disappointing financials, bleak growth prospects, higher-than-industry valuation, and low profitability, we think it could be wise to avoid the stock now.
How Does GameStop Corp. (GME) Stack Up Against its Peers?
GME has an overall POWR Rating of F. One could also check out these other stocks within the Specialty Retailers industry with an A (Strong Buy) rating: TravelCenters of America LLC (TA) and Murphy USA Inc. (MUSA).
GME shares were trading at $39.45 per share on Thursday afternoon, down $1.08 (-2.66%). Year-to-date, GME has gained 6.34%, versus a -10.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
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.
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