Subscribe to Entrepreneur for $5
Subscribe

The Good, the Bad, and the Ugly for GameStop Stock

InvestorPlace - Stock Market News, Stock Advice & Trading Tips There were some very encouraging aspects of GameStop's third quarter results, but GME stock is still unattractive at this point....

By
This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

There were both positive and negative aspects of GameStop (NYSE:GME) stock and its third-quarter earnings report.

GameStop (GME) video game and electronics store logo sign in Bay Terrace, Queens, NY.
Source: quietbits / Shutterstock.com

On the positive side, I think that the company is taking multiple steps that will move it closer to its goal of becoming an e-commerce giant, and the retailer was able to generate significant year-over-year sales growth.

But unfortunately for the owners of GME stock, the company’s failure to report its Q3 commerce sales and the news that the SEC is probing GameStop were significant negative news for the company and its shareholders.

What’s more, GME stock remains meaningfully overvalued and will likely be pulled down much further in the near-to-medium term by the ongoing retreat of meme stocks.

Here are the good, the bad, and the ugly when it comes to GME stock, along with my recommendation on the name.

The Good

Despite the easing of the coronavirus pandemic in the third quarter versus the same period a year earlier, GameStop’s top line climbed an impressive 29%, reaching slightly below $1.3 billion. The increase suggests that the company’s new strategies are, at least to some extent, bearing fruit. And encouragingly, GameStop’s revenue beat analysts’ average outlook of $1.19 billion.

Generally, I remain fairly impressed with the steps that the company is taking as it looks to become a leader in the consumer electronics e-commerce.

For example, GameStop CEO Matt Furong reported that it has hired professionals in important categories such as “e-commerce, UI, UX… operations and supply chain.” Furlong added that, “Over the course of 2021, we have made more than 200 senior hires from some of the top technology companies.”

Meanwhile, utilizing new warehouses that it has built in several parts of the U.S. in recent years, GameStop has reduced its shipping times.

And perhaps most importantly, Furlong reported that the retailer “continued growing our catalog by adding new products across consumer electronics, PC gaming and other categories with significant addressable markets.”

All of these steps in general and increasing the number of products that it sells in particular should move the retailer closer to becoming a leading e-commerce player in the consumer electronics and gaming spaces. And I still believe that, over the longer term, the company can accomplish that.

The Bad

Up until the fourth quarter of fiscal 2020, which ended on Jan. 30, 2021, GameStop had reported its quarterly e-commerce sales and the year-over-year increase of those sales. But I was not able to find any data on the company’s e-commerce sales for Q4 of 2020 and all subsequent reported quarters.

Perhaps the retailer’s e-commerce year-over-year growth slowed meaningfully in the wake of the release of the vaccines for the coronavirus. That would make sense, since the release of the vaccines prompted many consumers to go out more. And that likely resulted in much less video game playing than before the shots were introduced.

Still, the company’s decision to refrain from publishing its e-commerce data raises the possibility that its e-commerce sales growth has, for some reason, tremendously decelerated to worrisome levels.

The Ugly

In conjunction with its fiscal Q3 results, the retailer reported that it had received a subpoena from the SEC. Although the company reported that it’s not expected to be damaged by the probe, the investigation could distract its management at a time when its top executives have to work very hard on the turnaround effort.

Moreover, indicating that the SEC is not very pleased with the meme-stock phenomenon, the agency has “singled out the ways that trading platforms may encourage excessive trading through game-like prompts,” The New York Times reported in November. And SEC Chairman Gary Gensler has complained about ” “psychological nudges” provided by some brokers.

Consequently, I would not be very surprised if the agency punishes companies like GameStop that did nothing to discourage the irrational surge of their shares. Such a step could make future meme-stock rallies less likely.

And on the valuation front, GME stock’s levels are still excessive. The shares are changing hands for nearly 2x analysts average 2023 revenue estimate. Best Buy (NYSE:BBY), unlike GameStop, is profitable, but BBY stock is trading for less than 0.5x analysts’ mean 2023 revenue outlook.

Meanwhile, as I’ve noted in earlier columns, meme stocks appear to have lost their momentum in recent weeks. In the last month, for example, GME stock has tumbled 28%.

The Bottom Line on GME Stock

I still believe that GameStop’s turnaround can work. But given the information in the bad and ugly portions of this column, I recommend selling the shares.

If the stock drops to the $60 to $75, the company makes much more progress in its turnaround and/or a majority of the bad and ugly points dissipate, GME stock could very well be worth buying in the future.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful, contrarian picks have been solar stocks, Upstart, Roku, Plug Power, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.

More From InvestorPlace

The post The Good, the Bad, and the Ugly for GameStop Stock appeared first on InvestorPlace.