GME Stock: Why GameStop’s Q2 Earnings Aren’t Good Enough

GameStop (NYSE:GME) stock experienced some extreme volatility on Thursday after the company reported second-quarter earnings. GameStop’s earnings and revenue numbers were predictably terrible. The story GameStop management told on the earnings call was predictably bullish. Everything about the earnings report was par for the course, which is probably why the stock closed the next day up less than 0.4%.

GameStop (GME) Store at a street corner with people walking past it
Source: rblfmr/Shutterstock.com

In a nutshell, earnings don’t matter for story stocks like GME stock. There’s virtually no numbers GameStop could have reported that would justify a $14.3 billion market cap. Here’s a look at what does and doesn’t matter from GameStop’s Q2 numbers.

Earnings Don’t Matter For GME Stock

Maybe GME stock bulls were happy with the second-quarter report. Maybe they weren’t. Either way, you can rest assured that the GameStop earnings didn’t matter when it comes to the stock price.

GameStop reported an adjusted second-quarter loss of 76 cents per share, missing consensus analyst estimates of a 67-cent loss. Revenue for the quarter was $1.18 billion, beating analyst expectations of $1.12 billion. Revenue was down 7.8% from two years ago.

I’m comparing 2021 numbers to 2019 because those are pre-pandemic numbers. Highlighting that revenue is up 25% from where it was in the middle of a pandemic economic shutdown isn’t a useful measure of how well a company is performing.

But the whole point of this story is that any numbers GameStop reported this week are essentially meaningless when it comes to GME stock.

GameStop Turnaround Thesis

GME stock is a cult stock. Its business doesn’t matter to its stock price as long as it remains a meme stock.  The chart below tells you all you need to know about why earnings and revenue don’t actually matter for GME stock. Can you spot the point in the chart at which GME stock became a meme instead of a typical retail stock?

 

 

 

 

 

 

 

 

 

 

 

I’ve written before about how GME stock is valued ridiculously higher than retailers like Best Buy (NYSE:BBY) that actually have thriving businesses. GameStop’s annual revenue peaked back in 2012. But again, those numbers don’t really matter. GME stock is up 950% in 2021 because of a story, not because of a business.

There are two GME stock bull theses. The first thesis is the typical story stock narrative. Yes, GameStop’s revenue peaked in 2012. Yes, its revenue was declining in 2019 even prior to the pandemic. But the GameStop story stock narrative is that the company is transitioning from a brick-and-mortar retailer in secular decline to a high-growth tech stock.

As I’ve said before, every single penny stock out there has a story about how investors should ignore what it actually is and instead imagine how great it could be in the future. Don’t worry about the numbers. Believe the story. In this respect, GameStop isn’t particularly special.

GameStop Conspiracy Theory Thesis

The other GME stock bull thesis is that there is a conspiracy against the stock involving short sellers, hedge funds, regulators and even yours truly and other journalists. This theory is that hedge funds are illegally naked shorting GME stock and paying off regulators and journalists like me.

I hate to have to do this. But because of comments I have received, it’s clear at least a small portion of GME stock investors need it. The definition of a conspiracy is as follows: “an evil, unlawful, treacherous, or surreptitious plan formulated in secret by two or more persons.” So the GME stock conspiracy theory is that hedge funds pay off me and pay off regulators and other journalists to look the other way while they illegally short the stock.

For the record, I have never even been approached by a hedge fund to write any story. None of my editors have pressured me in any way. But conspiracy theorists probably won’t care what I have to say because they believe I’m a co-conspirator.

How To Play GME Stock

If you want to gamble on a meme stock, have fun with GME stock. It’s at least as likely to go up as it is to go down in the near-term. Just don’t pretend that it is something that it isn’t. It’s not a good investment. Maybe someday, it will turn into an investable company, one that’s not in secular decline. But even at that point, it will likely take a decade of growth to justify its current $14.3 billion market cap.

I get the sense that the vast majority of GME stock investors know what’s up. They are gambling and having fun on social media, and that’s perfectly fine. That’s the beauty of a free market, and I made a killing in the past trading penny stocks. Just don’t confuse GME stock with a sound long-term investment. And don’t pretend GameStop’s earnings matter.

On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.


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