Well before the novel coronavirus upended multiple industries, GameStop (NYSE:GME) was on the wrong end of a paradigm shift. Prior to streaming and big-name competitors like Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) moving into the video game space, GameStop was an incredibly popular place to acquire both new and used titles. Now, it’s fair to wonder if GME stock can survive this latest headwind.
Adding more intrigue is the gaming retailer’s first-quarter earnings report for fiscal 2020. As you might imagine, sentiment isn’t too hot for the company’s key financial metrics. Covering analysts anticipate that earnings per share will come in at a loss of 47 cents. Individually, estimates range from a loss of $1.97 to a positive 27 cents.
In the year-ago quarter, EPS came in at 7 cents, beating the consensus target for a loss of 3 cents.
On the revenue front, analysts have a consensus target of $1.1 billion. As with EPS estimates, the individual forecasts vary wildly, ranging from $800 million to $1.4 billion. But even if sales were to come in at the highest end of the spectrum, they would fall short of the year-ago quarter’s $1.6 billion.
Therefore, it wasn’t surprising that GME stock dropped more than 6% to close Friday. Unless management has positive consumer traffic data from their store reopenings, it could get ugly for GME.
Like all discretionary retailers, the once-proud gaming shop had to adjust to the new normal. Still, with so many stores shuttered due to the Covid-19 pandemic, GameStop stock absorbed serious volatility. Can it survive the coming earnings apocalypse?
A Difficult Narrative for GME Stock
As you know, GME stock was a surprising subject of a risky bullish narrative. Famed short-seller Michael Burry, who predicted the subprime mortgage crisis that eventually led to the Great Recession, suddenly went the opposite direction, supporting the bullish contrarian case for GameStop.
Here’s the crazy thing: Technically, he wasn’t wrong.
As I covered last year, shortly after Burry made his shocking pick, GameStop stock moved substantially higher. It held its newfound gains up until early January of this year when shares collapsed. But even with the wildness that the coronavirus caused, GME still finds itself in positive territory.
But will Burry like GameStop now in the new normal? Indulge my silliness for a moment. If Burry knew that a pandemic was coming, I doubt that he would be positive on GME (or anything for that matter). So, it’s fair to say he might not follow through on a second act.
If that’s the case, I wouldn’t blame him. A major reason for GameStop’s allure isn’t just its gaming library. This is an organization that once capitalized on the social experience, an attribute that you just don’t find with e-commerce. For instance, GME tempts consumers with secondary purchases. With an array of attractively priced products, it’s easier to drive revenue beyond the primary intent. As well, big crowds and lively salespeople tend to drive excitement.
Sadly, the social element is now a huge liability in the era of social distancing. Yes, pent-up demand is refueling at least a partial economic recovery. However, it’s also fair to point out that many Americans are apprehensive about contact with strangers, given the mental toll that the coronavirus has extracted.
This uncertainty will likely cloud GameStop stock.
The Audacity of Hope
For most investors, GME is admittedly a lost cause. Currently, the economic environment does not support mass-scale consumerism; indeed, quite the opposite. Unless retailers are selling food or essentials, this industry is on life support.
Yet I believe there is one way that GameStop can reclaim some of its lost territory. And the coronavirus, which has been so devastating to GME stock, can now help the cause on the back end.
To no one’s surprise, alcohol consumption during the dark days of the national lockdown went up, as did other vices. As I just mentioned, the pressure on mental health has been crippling for millions of Americans. They need an outlet, and many have chosen alcohol.
But such behaviors are obviously not great for long-term health nor are they beneficial to the wallet. But cheap, secondhand video games? That’s a relatively easy way to cope with the pressure. Plus, physical console purchases are one-time only. Naturally, this represents a pivotal contrast to subscription-based entertainment services, such as Netflix (NASDAQ:NFLX) or Disney (NYSE:DIS).
Does that mean GameStop stock is a clear buy? No. But should a disappointing earnings result discount GME, I would be interested in the cheap, one-time only purchase entertainment angle. It was a relevant story before the pandemic. Afterward, it will remain relevant, perhaps even more so.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is considering a long position in GME stock in the next 72 hours.