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GME – Weak Holiday Outlook Brings GameStop Stock Rally to a Halt

Of course, GME stock was already up big this year


GameStop (GME) stock was a risk heading into the company’s third-quarter earnings report, which was released after the bell yesterday. In fact, InvestorPlace’s Adam Benjamin warned GME stock investors about possible troubles surrounding GameStop earnings earlier in the week.

gme-stock-gamestop-stockAnd he was right. So far in today’s trading, GME stock is off by 9% to under $48.

Of course, GME stock had already posted a nice gain for the year heading into the GameStop earnings report. Shares had nearly doubled year-to-date, so it is reasonable that GameStop stock would suffer a pullback.

But today’s drop in GME didn’t come because Q3 earnings were disappointing. Instead, most metrics in the GameStop earnings were pretty solid.

What’s Weighing on GME Stock?

The GameStop earnings report showed that sales rose by 19% to $2.11 billion, while earnings came to 58 cents per share of GME stock. That’s an increase of 45% from the same period a year ago. Meanwhile, the Street was looking for a profit of 57 cents per share of GameStop stock on sales of $1.98 billion.

Comparable store sales growth were also impressive for GME. The company posted a 20.5% jump, which was above its own forecast of 11% to 15%.

A key driver for the GME growth was a 43.1% increase in new in software sales. A big part of this was due to the massive demand for Take-Two Interactive Software’s (TTWO) Grand Theft Auto V. Plus, GameStop has also seen traction with mobile and digital offerings — another factor that’s propelled GME stock higher so far this year.

On top of that, GameStop and GME stock should (in theory) benefit from the launches of new consoles: Sony’s (SNE) PlayStation 4 and Microsoft’s (MSFT) Xbox One. It looks like both the PS4 and Xbox One will be big winners and fuel sales of new titles.

What’s more, GME is feeling less pressure from its competition. For example, according to the The Wall Street Journal, Walmart (WMT) has been reducing space for videogames.

So given all this, why are investors dumping GME stock? Well, it looks like the holiday season is shaping up to be tougher than expected. In Q4, the company thinks its earnings per share will be $1.97 to $2.14, which compares to the consensus of $2.15 per share of GameStop stock.

This is certainly ominous, especially in light of the mega launches of new consoles like the PS4. Plus, it may also be yet another sign that the videogame industry is still struggling from the shift towards games on Apple (AAPL) iOS devices and Google (GOOG) Android phones.

No wonder many GME stock investors decided it was better to protect their big-time profits.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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