Earnings Pitfalls Make Harsh $23 Target Possible for GameStop

In one of the most fascinating events of 2021, video-game retailer GameStop (NYSE:GME) became the poster child of Reddit rallies and meme trades. Short sellers got clobbered as almost miraculously, GME stock soared to unforeseen heights early in the year.

GameStop (GME stock) logo on the outside of a store
Source: Emil O / Shutterstock.com

Things have changed since then, though. There were other mini-rallies along the way, but for the most part, retail traders’ fascination with GameStop faded during 2021’s second half.

This isn’t to say that the Reddit short-squeeze mob won’t return for another round in 2022. Anything’s possible when traders band together — that’s a lesson which short sellers can’t afford to forget.

However, if you’re counting on the coming year to resemble 2021, don’t bet your hard-earned money on it. There’s plenty of room for GME stock to sink to new short-term lows — and one Wall Street expert’s got his eye on a surprisingly low price target.

A Closer Look at GME Stock

You’ve got to hand it to the Reddit traders. When they work together, they can push a stock up to astounding heights.

Back in January of 2021, they started the whole meme-rally trend by forcing GME stock from $17 to, believe it or not, $383. It was both a hype cycle and a moral crusade as the retail traders got their revenge on the big-money short sellers.

Moral considerations aside, it’s awfully difficult to sustain a rally of that speed and magnitude. Thus, the GameStop share price was destined to decline — though admittedly, the folks at Reddit put up a pretty good fight.

There were smaller price run-ups in March and June, but after the summer came and went, the rallies only got smaller. Disappointingly, GME stock closed out 2021 at around $150. As we’ll discuss in a moment, though, $150 could just be a stairstep on the way down to much lower price points.

Bad Earnings Report

Not long ago, InvestorPlace contributor Larry Ramer cited GameStop’s “weaknesses, high valuation and risks” as reasons to sell the stock/avoid the stock.

As much as I trust Ramer, I just had to conduct my own due diligence on this. The fiscal facts, sadly, were even worse than I had expected.

For one thing, Ramer was unable to locate any data on GameStop’s e-commerce sales for 2020’s fourth quarter or any subsequent reported quarter. I search around as well, and came up with nothing.

That’s disconcerting, to say the least. Were GameStop’s e-commerce sales so bad that the company simply declined to report the numbers?

I’ll let you form your own conclusion on that matter. What we do know for certain is that GameStop incurred a third-quarter 2021 net earnings loss of $105.4 million. That’s substantially worse than the company’s $18.8 million net earnings loss from the year earlier. And bear in mind, Covid-19’s economic impact was more intense then, compared to Q3 2021.

The Powers of Crowds

Ramer also pointed out that GameStop received a subpoena from the Securities and Exchange Commission (SEC). Apparently, the SEC issued a subpoena requesting additional documents related to an investigation regarding trading activity of GME stock.

Between the SEC’s probe and the company’s worsening profit profile, the future’s not looking great for GameStop.

Yet, few experts on Wall Street are more bearish than Ascendiant analyst Edward Woo. Reportedly, he issued a “sell” rating on the shares, along with a jaw-dropping $23 price target.

Evidently, Woo isn’t wooed by Reddit’s grassroots appeal. As he put it, GME stock “no longer trades on traditional fundamental valuations or metrics” nowadays.

Instead, according to the Ascendiant analyst, GameStop is riding on “retail investors’ sentiment, hope, momentum, and the powers of crowds.”

Those crowd are indeed powerful — the meme-stock rallies of 2021 proved this. Nevertheless, Woo feels that the fundamentals clearly point to weaker returns going ahead for GameStop.

Woo cited a major issue: GameStop’s software sales declined 2% year- over-year during the most recent quarter. Gamers are transitioning from physical hardware to digital downloads, and that’s clearly problematic for GameStop.

The Bottom Line

Only time will tell whether GME stock actually gets to $23. For all I know, the Reddit crowd might stage another share-price comeback.

Yet, sitting around and hoping for another short squeeze isn’t much of an investment strategy. Rather, informed traders should use the data as their guide.

As it turns out, the data suggests that GameStop isn’t in a favorable financial position. At the end of the day, it’s fine to take a small position in GME stock for the fun of it, but don’t expect 2021’s hype phase to persist in 2022.

On the date of publication, David Moadel 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.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarketsFinom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. 

Article printed from InvestorPlace Media, https://investorplace.com/2022/01/earnings-pitfalls-make-harsh-23-target-possible-for-gme-stock/.

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