Video-game retailer GameStop Corp (NYSE:GME) looks like a “no-brainer” investment in some ways. Unlike any other time in recorded history, geek culture is celebrated, even monetized. Just consider the rise of video game competitions — ahem, e-sports — and unprecedented events such as drone racing.
Unfortunately for investors of GME stock, geek culture hasn’t translated to consistent profitability.
Year-to-date, GameStop shares are down 16%. The volatility contrasts sharply with the good fortunes of video-game manufacturers such as Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI), which are up 50% and 70%, respectively, for the year-to-date.
Why can’t GME capitalize on an otherwise robust video-game market?
GameChangers editor Hilary Kramer explains that video-game distribution is shifting towards an “online/streaming model along with the rest of civilization.” Yes, GameStop is working to head in that direction, too, but with games increasingly going toward digital distribution — not just on PCs, but even for consoles — the core GameStop business model is becoming antiquated.
And no matter how great the niche is, GameStop is first and foremost a retailer, and right now, retail is ugly, and its components are broadly getting hammered. Foot traffic is on the decline, consumer dollars are increasingly going online, and even in rare instances where a retailer posts decent numbers, they’re still often pounded in response.
That means, come GameStop’s quarterly earnings report, due out Thursday after the bell, GME essentially has to amaze to keep the bears at bay.
GameStop Is Treading in Shallow Waters
GameStop at least has history on its side. That is, since the final quarter of fiscal 2016, GME has either met or exceeded earnings targets. That includes a 24% upside surprise in profits when it recorded 63 cents in EPS last quarter.
For second-quarter earnings, Wall Street is looking for 15 cents per share — down significantly from the year-ago period’s 27 cents. Given recent revenue trends, and broadly low expectations, GameStop seems likely to top estimates.
The lingering question is how long sales can continue to press forward.
GME stock bulls counter that the company is countering challenges to its core business with, among other things, a diversification into wireless reselling (called Technology Brands).
At first glance, GameStop appears to have made a shrewd business decision. As InvestorPlace contributor Ian Bezek notes, the retailer operates “Apple Inc. (NASDAQ:AAPL) Apple stores in smaller markets. GameStop is also the largest operator of AT&T Inc. (NYSE:T) authorized reseller stores.”
But the timing is sadly off the mark. At the same time GME has invested billions in Technology Brands, America’s four major wireless operators are pitted in a brutal price war that’s killing margins.
Bottom Line on GME Stock
GameStop already has shed 15% this year, fitting right end with the rest of the ailing retail sector. Downside pressures are mounting. And Wall Street is absolutely not giving retail stocks the benefit of the doubt this Q2 earnings season.
And yet, I don’t think an outright bearish position is the correct play.
GME stock is what I would term a “stupidly bullish” investment at the moment. Many of my colleagues aren’t enamored with it. Analysts covering GameStop sit in the middle of the road, which is worrisome given Wall Street’s typically buy-heavy tilt toward most stocks. And GameStop’s 7% dividend yield, while generous, has ballooned mostly because of price declines, not payout hikes.
Still, in the short term, GME appears to be recovering, putting in a set of higher lows in its nearer-term chart. It has stabilized. And a few retailers — like Express, Inc. (NYSE:EXPR), which is up 20%-plus today — have bucked the trend of retail stocks getting slammed despite quality results.
I’m no fan of GameStop’s core business, and I think multiple threats will eat away at the company’s growth and profitability over the long haul. But GME stock has just enough at the moment to make life really painful for the shorts.
If you wanted to play GME bearishly, consider reducing your risk via options. Otherwise, hit the sidelines for GameStop’s Q2 earnings report.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
