GameStop Corp. (Ticker Symbol: GME) reported earnings after the closing bell on Tuesday. The video game and electronics retailer reported an earnings per share loss of .32 cents per share vs. Wall Street analysts’ expectations of a loss of .21 cents per share. The company reported a revenue loss worse than the street was expecting at $1.29 billion vs. Wall Street analysts’ estimates of $1.34 billion. GameStop reported a decline in both new video game hardware and software sales due to a decrease in the number of title launches and the adaptation of digital and online games. Sony and Microsoft will both be releasing new consoles that will have physical optic drives, which will help extend GameStop’s existence.
Above is a long term chart of GameStop’s stock over the past decade. GameStop spent the years of 2009-2013 trading in a horizontal channel. Horizontal channels are usually viewed as areas of indecisiveness between buyers and sellers. GameStop’s stock was at a point where supply and demand were relatively balanced and the price was trading within a certain range — in GameStop’s case, between roughly the $34.00 and $15.00 price levels. The stock finally broke out of that range led by a positive earnings release in the first quarter of 2013. The stock then proceeded to rally over 90% over the next three quarters coming within 10% of its all-time high.
In the fourth quarter of 2013, the stock topped forming a bearish divergence pattern (as indicated on the chart by the yellow lines) where the stock makes a higher high in price but the Relative Strength Index makes a lower high. Unfortunately for GameStop’s shareholders, at the beginning of 2016, the stock proceeded to breakdown through its uptrend and traded below both its 100 and 200-week moving averages. The stock then proceeded to put in a “double top” reversal pattern. This pattern occurs when the price of an asset reaches a high price, has a small sell-off then retests that high failing to break above it. The pattern is confirmed once it breaks above the low between the two prior highs.
Some traders use what’s called a “measured move” to try and project where the stock might go in the future based on breakouts from technical formations. In GameStop’s case, one would take the high prices from the top of the pattern (roughly $35.00), the price of the neckline from the pattern (roughly $25.00), and then subtract them to get the difference ($10.00). The difference is then projected from the neckline in the direction of the breakout to project the price of the measured move: Neckline + Difference = Measured Move. In GameStop’s case, the projected price target from the “double top” pattern was roughly $15.00, which it achieved roughly two years after breaking out from that pattern. Currently, GameStop’s stock is coming off of the all-time lows it made in July.
(Chart above courtesy of www.tipranks.com)
Based on a survey of two analysts offering 12-month price targets, the average price target for GameStop’s stock is $6.50. According to that number, the stock is priced at a discount relative to Wall Street’s analysts and could be considered undervalued around current levels near $4.59.
The video game retailer has been reducing its physical footprint over the past two-and-a-half years by closing more than 250 locations domestically. The continued shift from disc-based games to digital downloads will continue to put pressure on GameStop’s growth, but hopefully for the shareholder’s, the new physical optic drives can be the positive catalyst it needs to continue higher.
Investors in GameStop should look to their next earnings release on December 1st for fresh news within the company.