Gamestop (Ticker Symbol: GME) reported earnings after the closing bell on Tuesday. The video game and electronics retailer reported an earnings per share beat of .07 cents per share vs. Wall Street analysts’ expectations of .02 cents per share. Net sales reported were down 13% year over year to $1.547 billion vs. Wall Street analysts’ estimates of $1.665 billion. Gamestop reported a decline in both new video game hardware and software sales, due to lack of title launches and the adaptation of digital and online games.
Shares of Gamestop were down nearly 50% year-to-date before the earnings call yesterday, due to lack of earnings guidance from the first quarter and buyout hopes being put out. Also, Sony and Microsoft, the primary game console makers, haven’t produced a new console in years and don’t have any plans on releasing one this year. In early March, Gamestop announced a new $300 million share repurchase program but the stock has not reacted positively to the news and has been trading lower since the report.
The video game retailer has been reducing its physical footprint by closing poorly performing locations: more than 130 of them in 2017 and just under 100 in 2018. The ongoing shift from disc-based games to digital downloads has continued to put pressure on Gamestop’s core strategy. Seth Sigman, a Credit Suisse analyst, downgraded Gamestop in May, cutting their price target from $10.00 to $7.00.
Above is a chart of Gamestop’s stock over the past ten years. Gamestop spent the years of 2010-2013 trading in a range between the $28.00 and $16.00 dollar 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 purple squares, where the stock makes a higher high in price but the Relative Strength Index makes a lower high. Traders and investors sometimes look at divergences for a possible pause within the current trend which can, at times, lead to a reversal as occurred in Gamestop’s case. At the beginning of 2016, the stock proceeded to break through its uptrend and traded below both its 100 and 200-week Moving Averages. Currently, Gamestop’s stock is trading just over 30% away from the all-time lows it made from 2003.
(Chart above courtesy of www.tipranks.com)
Based on a survey of 8 analysts offering 12-month price targets, the average price target for Gamestop’s stock is $8.88. 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 $5.04.
Gamestop seems to have an uphill battle ahead. The company continues to close multiple brick and mortar locations as a way to cut overhead costs. With no new gaming consoles in the pipeline for Sony or Microsoft, sales could continue to be weak in coming quarters for Gamestop. Investors in the space should look to Electron Arts’ (Ticker Symbol: EAWealth Strength IndexEA is Flat and trending Down) earnings release on July 30th for fresh news within the sector.