It's been a rough year for GameStop (NYSE: GME) investors, but at least one Wall Street pro is looking forward to next week's quarterly results out of the meandering video-game retailer. Loop Capital analyst Anthony Chukumba feels that Best Buy's (NYSE: BBY) strong quarterly showing on Tuesday -- at least as it pertains to its video-game business -- is a good sign for GameStop ahead of its own Sept. 6 earnings report.
The market wasn't impressed with Best Buy's latest showing. The stock took a 5% hit on Tuesday as weak guidance for the current quarter snuffed out the initial excitement of posting better-than-expected financial results for its fiscal second quarter. However, it did single out the strength in its gaming business a couple of times during its Tuesday morning earnings call. Best Buy noted unexpected strength in gaming consoles. The Fortnite phenomenon has been generally weighing on retailers as the battle royale game can be downloaded directly from Epic Games and played online, but Best Buy is pointing out that the game's success is actually resulting in a spike in accessories and peripherals for it and other social games that enhance the gameplay experience.
In short, GameStop may not be on the death spiral that its stock chart would seem to suggest.
Image source: GameStop.
Come out and play
Loop Capital's Chukumba isn't necessarily bullish, here. He's sticking to his hold rating on the stock, and his $14 price target is essentially where the shares find themselves at the moment. He continues to see long-term challenges with GameStop's core business in a secular decline. Investors will be keying in on GameStop's CEO search, an early read on the telltale second half of the fiscal year, and any clarity on the buyout chatter that's been bubbling up in recent weeks. However, if the improvement that Best Buy superstores saw in their consoles and accessories carries over to the smaller GameStop shops, this might not be such a lousy report next week.
GameStop investors could use a break. The stock is trading 18% lower year to date, setting this up to be the fifth year in a row in which GameStop shares decline.
This has also been a rough week for the suburban strip mall staple. The stock moved sharply lower on Monday after Xbox All Access was introduced. Baird analyst Colin Sebastian points out that the new bundle that pairs up a console with the subscription service that offers online access to games is a risk to GameStop's core business. Software, particularly secondhand software, carry much higher margins for GameStop than its hardware business does. Digital delivery eats into both the initial game sale at GameStop and the prospects for returns for store credit. It didn't help that Bloomberg credited at least part of this week's decline to investors losing faith in a potential buyout of GameStop.
Under a rosier scenario, GameStop would be a screaming buy. The stock is trading for less than five times earnings with a chunky 10.8% yield to reward patient investors. However, with earnings going the wrong way and the trend grinding against its model's viability, it's easy to see why the market is scared. Next week's report will hopefully reveal some silver linings to burned shareholders.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short October 2018 $15 calls on GameStop. The Motley Fool has a disclosure policy.