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Bear of the Day: GameStop Corp. (GME)

Benjamin Rains

GameStop’s (GME) downturn has been years in the making as the massive and quickly expanding video game industry trends more heavily toward digital and mobile.

GME & Industry Overview

GameStop was once at the forefront of the retail gaming industry. The Grapevine, Texas-based company still boasts roughly 5,700 stores around the globe and it attracts gamers, who might not want to shop at places like Best Buy (BBY) or Walmart (WMT) and Target (TGT). However, the last five years have seen the firm’s sales decline as more people turn to digital downloads and mobile games.

The global gaming market is projected to jump roughly 10% in 2019 to reach $152.1 billion, based on market research firm New Zoo estimates. Yet, smartphone-focused mobile gaming, which is hardly GameStop’s domain, is projected to account for 45% of sales.

The growth of mobile gaming has seen tech giants dive into the space. Apple (AAPL) just officially launched its new $4.99 per month subscription-based gaming service called Apple Arcade. Meanwhile, Google (GOOGL) is ready to debut its Stadia cloud gaming offering later this year.  

GameStop must capitalize on mobile, subscription, and cloud gaming because its recent moves to cut costs haven’t been enough to inspire confidence. The company said on September 10, when it reported its second-quarter earnings results, that it plans to close between 180 and 200 stores by the end of fiscal 2019. The firm also plans to try to make its stores more attractive to the growing world of e-sports.

Meanwhile, investors have pushed GME to shake things up. This includes a push to change the board. With that said, the company will likely have to wow Wall Street soon after it eliminated its dividend in June.

 

 

 

 

Outlook & Earnings Trends

Looking ahead, our current Zacks Consensus Estimates call for GameStop’s third-quarter fiscal 2019 revenue to tumble 22.6% to $1.61 billion. Last quarter, the company’s sales fell 14.3%, with comps down 11.6%. The firm’s vital Q4 holiday-season sales are expected to sink 8.6%, with full-year fiscal 2019 revenues projected to fall 17%.

At the bottom end of the income statement, the video game seller’s adjusted quarterly earnings are projected to plummet 88%. Peeking ahead, fourth-quarter earnings are expected to slip 3.5% to help 2019’s EPS figure fall over 48%. GameStop’s 2020 outlook doesn’t look better, with earnings projected to sink another 19%, on 2.8% lower sales.

On top of that, the company’s earnings estimate revision activity has trended heavily in the wrong direction, especially for Q3, as well as fiscal 2019 and 2020. Overall, GameStop’s earnings revisions have moved almost completely in the wrong direction over the last five years.

 

 

 

 

Bottom Line

GameStop is in a rough stop. One thing that could theoretically spark at least a small comeback is its price. The stock has traded as low as $3.15 per share over the last 52 weeks and as high as $16.90.

GME stock jumped 3.79% Wednesday to $5.20 per share. With that said, a “cheap” price alone isn’t likely to help that much when we consider GME’s outlook. GameStop is a Zacks Rank #5 (Strong Sell) right now that sports an “F” for Momentum in our Style Scores system.

Investors interested in the broader space might want to take a look at #2 (Buy)-ranked Hasbro (HAS) or Take-Two Interactive (TTWO) and Activision Blizzard (ATVI), which are both #3 (Holds).

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