Video game and electronics retailer GameStop Corp. (GME) continues to grapple with declining revenue, massive losses, plunging market share, and increasing cash burn. The stock, which witnessed skyrocketing rallies in the past driven by retail investors’ interest, is expected to keep losing in price this year.
Shares of GME have slumped 38.7% over the past six months and 28.4% over the past year to close the last trading session at $16.87. The stock is currently trading below its 50-day and 200-day moving averages of $19.64 and $26.62, respectively, indicating a downtrend.
In this article, I have discussed several reasons why investing in this stock could be risky.
Two years ago, during the peak of the COVID-19 pandemic, the stock market was in the grip of meme mania. On January 28, 2021, GME hit an all-time intraday high of $483 as retail traders coordinated on social media and triggered a short squeeze rally. It is regarded as the first meme stock whose price increased as much as 100x quickly.
After massive losses in 2022, GME, among other speculative stocks, posted some gains at the start of this year on premature hopes of a pause in the Fed’s rate hike cycle. However, the hopes were dashed by upbeat economic data indicating jobs growth and high inflation levels.
The Fed’s persistent hawkish stance and other economic uncertainties will likely keep the stock market under pressure in the upcoming months. An uncertain market environment is a good enough reason to avoid the risk associated with this meme stock.
For the nine months that ended October 29, 2022, GME’s net sales declined 1.5% year-over-year to $3.70 billion. The company’s adjusted operating loss worsened by 101.8% from the year-ago value to $354.90 million. Its adjusted EBITDA loss widened by 150.2% year-over-year to $275.20 million. Also, its adjusted net loss and adjusted loss per share widened 88.8% and 78.8% year-over-year to $358.40 million and $1.18, respectively.
The retailer’s financial position is concerning, with cash burn being a major issue. As of October 29, 2022, GME’s cash and cash equivalents stood at $803.80 million, compared to $1.41 billion as of October 30, 2021. Free cash outflow was $274.30 million for the nine months that ended October 29, 2022.
Here are the factors that could affect GME’s performance in the upcoming months:
Disappointing Financials
For the third quarter that ended October 29, 2022, GME’s net sales decreased 8.5% year-over-year to $1.19 billion, while its gross profit came in at $291.60 million, down 8.5% year-over-year. Also, the company’s adjusted operating loss was $95 million for the third quarter.
In addition, GME’s adjusted EBITDA loss stood at $66.60 million during the quarter. The company reported an adjusted net loss and adjusted loss per share of $93.40 million and $0.31, respectively.
Discouraging Analyst Estimates
Analysts expect GME’s revenue to decline 2.2% year-over-year to $5.88 billion for the fiscal year that ended January 2023. The company’s loss per share for the same period is expected to widen by 15.2% year-over-year to $1.31.
Furthermore, analysts expect GME’s revenue for the current fiscal year (ending January 2024) to decline marginally from the previous year to $5.84 billion.
Elevated Valuation
GME’s trailing-12-month Price/Book multiple of 4.12 is 101.2% higher than the industry average of 2.05. Likewise, the stock’s trailing-12-month Price/Sales of 0.86x compare with the 0.85x industry average.
Low Profitability
GME’s trailing-12-month gross profit margin of 21% is 40% lower than the industry average of 34.99%. And its trailing-12-month EBITDA and net income margins of negative 7.33% and 8.54% compare to the industry averages of 11.51% and 4.57%, respectively.
Additionally, the stock’s trailing 12-month ROCE, ROTC, and ROTA of negative 33.92%, 14.97%, and 15.31% are significantly lower than the industry averages of 11.05%, 6.30%, and 3.92%, respectively.
POWR Ratings Reflect Bleak Prospects
GME’s overall D rating translates to a Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. GME has an F grade for Value, consistent with its higher-than-industry valuation. Also, the stock has a D grade for Sentiment, in sync with its bleak financials and disappointing analyst expectations.
In addition, GME has a D grade for Stability. Its 24-month beta of 1.76 justifies its Stability grade.
The stock is ranked #42 out of 44 in the Specialty Retailers industry.
Beyond what I have stated above, we have also given GME grades for Quality, Growth, and Momentum. Get all GME ratings here.
Bottom Line
GME reported disappointing financial results for the third quarter of fiscal 2022. Furthermore, the company’s near-term prospects look bleak as it struggles with mounting losses, declining market share, and increasing cash burn.
Given the company’s weak fundamentals and a challenging macro environment, we think this meme stock is best avoided now.
Stocks to Consider Instead of GameStop Corp. (GME)
The odds of GME outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three stocks rated B (Buy) from the Specialty Retailers industry instead:
Murphy USA Inc. (MUSA)
TravelCenters of America LLC (TA)
Aaron’s, Inc. (AAN)
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GME shares were trading at $18.12 per share on Tuesday morning, up $1.25 (+7.41%). Year-to-date, GME has declined -1.84%, versus a 4.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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