GameStop stock: Where next for GME stock ahead of Q1 earnings?

Key takeaways

• GameStop management continue with turnaround plan
• Sales still declining, but losses narrowing thanks to sharper focus on costs
• GameStop confident it is on a path to ‘full year profitability’
• But Wall Street is unconvinced and thinks it will remain in the red for years to come!
• GameStop up over 46% since start of 2023, but brokers think the rally has been greatly overdone.

 

When will GameStop release Q1 earnings?

GameStop is scheduled to release first quarter earnings after markets close on Wednesday June 7. A conference call is booked in on the same day at 1700 ET.

 

GameStop Q1 earnings consensus

Revenue is forecast to fall 2.7% from last year to $1.34 billion and its net loss is expected to narrow to $45.2 million from the $157.9 million loss booked the year before.

 

GameStop Q1 earnings preview

GameStop’s management, led by chairman Ryan Cohen and CEO Matt Furlong, continue to quietly try and get the company back on track but they still have a long way to go. The video game retailer and meme stock favourite managed to deliver a rare profit in the last quarter but this is not expected to continue. In fact, management still have a job to do in convincing the markets about its prospects considering Wall Street still believes GameStop will remain in the red and continue to see sales decline for at least the next three years!

There are some green shoots. Revenue may still be in decline but hardware sales have returned to growth and its small - but key - collectibles unit continues to grow (albeit at a slower pace), helping counter ongoing weakness in demand for software and games. Inventory levels have normalised. GameStop, like many retailers, suffered supply chain disruption last year that led to a backlog of inventory that needed to be shifted. Fortunately, GameStop did wonders by almost halving inventory levels sequentially in the last quarter and this should further drop to around $600 million in the first quarter.

Plus, GameStop has been in the red for five years but losses are narrowing and GameStop has now largely completed upgrading its infrastructure, distribution and digital platforms to position it well to move forward with a focus on ‘efficiency, profitability and pragmatic growth’, helping it shift online while improving its shipping capabilities and in-store shopping experience.

GameStop is already cutting costs and has started make layoffs. It is taking ‘a number of steps’ to improve profitability this year, which should improve efficiency and leaves some upside potential to estimates going forward. One area where costs are being reduced is in Europe, where GameStop has started to exit some countries to focus on core and more lucrative markets. The efforts are two-fold considering GameStop is also trying to boost its margin by expanding sales of more-profitable categories like collectibles and toys, where it has ‘already seen pockets of growth’ to capitalise on.

Any sign that it can stem the topline decline or escape the red in the near-term would be bullish for the stock. However, GameStop has not been providing forward guidance since new management took over in 2021, stating it wants shareholders to ‘judge us on our results instead of our words’, which may mean visibility remains limited for shareholders. Progress could also be muted in the first quarter after GameStop said it booked more transformation charges, suggesting benefits will start to feed through more later this year.

‘Although there is a lot of hard work and necessary execution in front of us, GameStop is a much healthier business today than it was at the start of 2021. We have considerable cash on hand, negligible debt, streamlined inventory and a path to full year profitability,’ said CEO Matt Furlong back in March.

Wall Street still have doubts. Analysts have pencilled-in a net loss of over $151 million for the full year and believes GameStop will be in the red in 2025 and 2026.

Markets have a different view considering GameStop shares are up 40% since the start of 2023 and at their highest level in 11 weeks as they become more confident that the company can return to profit. However, brokers believe this rally has been overdone and have a target price of just $13.25 on the stock, over 46% above the current share price! It is also worth noting that short interest remains high, at over 21% of its float according to data from Fintel, to show there are those betting against the company.

 

Where next for GME stock?

GameStop shares have rallied higher since the start of May, with a supportive trendline following the share price higher. We can see the stock came close to testing $25 on several occasions last week and this could be a key level to watch considering it has held as a reliable ceiling since late last year, apart from one brief move above here after it posted that surprise profit in the last quarter. A move above here would pave the way for the stock to climb above $27.

On the downside, a slip below the supportive trendline risks seeing the stock unravel back toward the lows seen at the start of May of $18, with the 2023 lows back in play below that.