Even at $5, GameStop Stock Isn’t a Buy

GameStop stock is getting smashed, down almost 40%. It's a no-touch for me.

GameStop stock is a big gamble

Source: Shutterstock

GameStop (NYSE:GME) stock is getting obliterated on Wednesday, with shares down more than 38% to sub-$5 prices after reporting earnings. GameStop stock is now down 66% in the past year and 83% over the past three. What in the world has happened to this company?

Source: Shutterstock

Easy. The digitalization of gaming and the proliferation of e-commerce has rendered GameStop unessential. There’s a reason I’ve been bearish on GameStop for a long, long time. Even here on InvestorPlace, I said the stock was heading for trouble. You don’t have to know much about retail to know that its business model simply doesn’t work.

Retailers selling new and used games is unnecessary in this day in and age. Sure, there’s a nostalgic factor to it. But at the end of the day, investors can buy games online and download them right to their consoles. For those who don’t want to do that, they can buy them right off Amazon (NASDAQ:AMZN) or Walmart (NYSE:WMT). Shoppers will still pay one of the lowest prices and have the game on its release date if they want.

The only data point you really need is this though: Microsoft (NASDAQ:MSFT) via its Xbox, Sony (NYSE:SNE) via its Playstation, Nintendo (OTCMKTS:NTDOY) via its Switch, Nvidia (NASDAQ:NVDA) via its chips and a whole host of others continue to see the secular growth in gaming.

GameStop stock? Not so much.

GME Earnings

Surprisingly, GME stock beat on earnings expectations for its fiscal first quarter results.

Earnings of 7 cents per share came in 10 cents ahead of expectations. Clearly that wasn’t enough to mask the company’s other shortcomings though. Revenue of $1.55 billion missed analysts’ estimates by $90 million and fell 13.5% year-over-year (YoY).

Obviously the company’s dividend yield was unsustainable, and so it’s no surprise that management eliminated it. The move will reportedly save GameStop stock almost $160 million per year. Given its ~$500 million market cap, that’s pretty noteworthy.

Comparable-store sales tumbled 10.3% YoY, while guidance calls for both revenue and comp-store sales to decline 5% to 10% this year.

Assets still outweigh liabilities, as do current assets vs. current liabilities. But the situation here is pretty grim. While management is doing its best to make GameStop more of an experience for its customers and is looking to cut costs, how much blame can really go to them? The changing tide in retail is sending a wrecking ball — almost literally — through thousands of bricks-and-mortar operations.

In April of this year, the U.S. had already surpassed the amount of store closure announcements we saw in all of 2018. We’re not exactly in a recession here, and it speaks to just how difficult the retail environment is right now.

Trading GameStop Stock

chart of GameStop stock

Wouldn’t it be great if GameStop stock could turn it around? I love a good comeback story and GME stock would be as good a candidate as any. I hope it can turn things around and become a buyout candidate in the future — or at least churn out some promising cash flow. Perhaps if it becomes the experiential destination that it needs to be to attract customers, it can pull it off.

That said, my hard-earned dollars aren’t going to be on the line waiting to find out. When $11 support turned to resistance in March, that’s when trouble began to brew. It was essentially GameStop stock waving the white flag. Shares soon went from $11 in mid-March to $8 by mid-May, a decline of more than 27%.

Given that shares were 50% off the January highs, not many investors were likely looking for GME stock to plunge like this. It’s got “no-touch” written all over it for me. It’s just too risky.

If GameStop stock can find its footing over the next few weeks, perhaps a snap-back rally up to prior channel support is in the cards. Otherwise, the 10-week moving average is likely to continue acting as resistance going forward. The retail sector is struggling and there are far better (and easier) places to invest right now.

Don’t be a hero with GameStop stock. Save that for the video games.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AMZN and NVDA.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/even-at-5-gamestop-stock-gme-stock-isnt-a-buy/.

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