- GameStop played a risky game by revealing weak Q1 results.
- GameStop’s mixed-shelf filing raises concerns about dilution.
- The stock is on a downward trajectory, possibly back to $10.
GameStop recently rekindled the market’s attention by delivering disappointing preliminary figures for Q1. Forecasting revenue in the range of $872 to $892 million, significantly lower than the $1.05 billion predicted by analysts, the company seems to be heading down a perilous path.
Given the prevailing economic headwinds, with consumers grappling with inflation and rising interest rates, the retail sector faces challenges. Retail sales, up by a modest 3% from the previous year, failed to keep pace with inflation, signaling a potential decline in consumer spending. Given that GameStop’s merchandise caters to discretionary consumer tech, the outlook appears bleak for a revenue uptick in the near term. Q1 results are eagerly anticipated in early June.
While the balance sheet remains stable, the cash burn persists. Despite a reduction in SG&A expenses, the company continues to incur losses of about $35 million, leaving its cash balance hovering around $1.083 billion. Although sufficient for sustaining operations for a few years at the current burn rate, tough decisions and possible liquidation loom ahead.
Dilution poses a significant threat to investors, with GameStop’s announcement of a mixed-shelf offering alongside its weak guidance, pointing towards a potential increase in shares or other dilutive actions. Although no specific amount was disclosed, the stage is set for substantial sales. The company’s recent efforts have already inflated the average share count by approximately 0.4%.
Lackluster Support for GameStop
Despite enjoying a fervent fan base among investors, GameStop lacks broader market support to propel it in any positive direction. With only one analyst, Wedbush, giving the stock a Strong Sell rating and a price target of $5.60 – significantly lower than the present valuation – institutional buying appears questionable. Institutional ownership stands at about 30%, reflecting skepticism due to the company’s high short interest and speculative nature. Insiders, holding another 12% of the shares, have predominantly offloaded their stakes over the last two years, except for CEO Ryna Cohen’s notable investment in Q2 2023.
Short interest remains a critical concern, notwithstanding the turmoil that elevated share price levels inflicted on short sellers. Reported at over 20% in the last disclosure, short interest potentially escalated further in the intervening period.
Navigating the Bearish Terrain
GameStop’s price movement reveals formidable resistance beyond the $40 mark. The notable spike and fall in share prices formed a large Shooting Star-type candle, suggesting that sustained prices above $30 are improbable. This candle serves as a confirmation of resistance at multiple price points, painting a grim picture of the prevailing downtrend. The anticipated trajectory indicates a probable retreat in prices, with a potential revisit to the $10 threshold on the horizon.