Is GameStop Stock Setting Up for Another Short Squeeze?

Video game and accessories reseller GameStop NYSE: GME stock had its wings clipped since kicking off the 2021 meme stock frenzy. These days, the Company continues to desperately transform its business model as it loses ground to digital gaming by the day. Major console makers Sony’s PlayStation NYSE: SNE and Microsoft’s NASDAQ: MSFT Xboxes have created all-you-can play gaming memberships, like PlayStation Plus and Xbox Game Pass, that allow gamers to download and stream to play literally thousands of games across previous consoles for a monthly fee. This completely eliminates the need to go to GameStop to purchase an old favorite game to play. The only drawdown is the huge amount of storage needed to be able to store all these digital copies of which can run over 100 gigabytes per game. Digital gaming is gaining more console players due to its convenience, access, and growing communities. It comes as no surprise since PC games have completely migrated to digital purchases rather than buying physical copies. Mobile games are predominantly downloaded digitally through Google Play Store NASDAQ: GOOG or Apple iTunes NASDAQ: AAPL. A dying business model and low expectations heading into the holiday season could leave complacent bears vulnerable to another potential short squeeze.

Short Squeeze Setting Up?

Short squeezes tend to happen when a combination of factors converges ahead of a surprising catalyst. These factors include a multitude of bad news, weakening fundamentals, high short interest, thinning liquidity on falling volume, and complacent short-sellers. All of the elements seem to add up with GameStop as their Q2 2022 earnings were weak and the conference call was abruptly ended with no question and answering session, leaving more questions than answers. Bad news may be good news for bears but can also set up a trap as they get complacent. The short interest has fallen to just 17.5%, which is still considered high for most stocks, but pales in comparison to the alleged 140% short interest preceding the historical short squeeze in 2021. 

The Next Blockbuster Video

In addition to facing heavy competition from retailers like Amazon NASDAQ: AMZN, Walmart NYSE: WMT, Target NYSE: TGT, and Best Buy NYSE: BBY, GameStop is up against a much tougher threat that could undermine its operating model. Just as the once-dominant video and DVD rental chain Blockbuster Video fell by the wayside to Netflix NASDAQ: NFLX and its digital streaming service, GameStop’s future looks bleak as gamers continue to migrate to digital video game purchases versus buying physical copies. Just as digital helped kill Blockbuster, digital is killing GameStop. With improved broadband capacity and speeds, a game can download a game in minutes that would have taken hours several years ago. This convenience is helping more gamers continue to migrate to digital copies for consoles. Incidentally, PC gaming has already switched almost completely over to digital purchases and downloads and the console industry is following in its footsteps. It doesn’t help that the video game industry has been flailing in 2022 amid cutbacks in personal discretionary spending as evidenced by NVIDIA’s NASDAQ: NVDA warning and Roblox’s NASDAQ: RBLX falling bookings.  

Digital  Versus Physical Video Games

The argument for digital streaming and downloading of video games versus buying physical copies at GameStop or online is one that is perpetually favoring the digital side. The best argument for still buying physical copies of video games is they can actually be resold, whereas digital games can’t be transferred or resold. Most physical video games still need to be installed on to the video game console and then require the CD to be inserted to play the game. Constant swapping of CDs on the game console can be a pain especially as different CDs get placed in different boxes and build up more clutter with each box. Physical games can be resold and also have the potential to become collectables in time as they become more scarce. The collectables video game market continues to grow provided they are kept in high grade conditions. However, this doesn’t help GameStop since their used video games are definitely worse for wear and show it.

Still in the Red

GameStop has only had a single profitable quarter in the past two and a half years. On Sept. 7, 2022, GameStop released its fiscal second-quarter 2022 results for the quarter ending July 2022. The Company reported an earnings-per-share (EPS) loss of (-$0.35) excluding non-recurring items versus consensus analyst estimates for a loss of (-$0.42), beating estimates by ($0.07). The Company reported a net loss of (-$108.7 million) compared to (-$61.6 million) due to transformation efforts and investments. Revenues fell (-4%) year-over-year (YoY) to $1.14 billion falling short of the $1.27 billion consensus analyst estimates. It’s collectibles segment revenues rose to $223.2 million, up from $177.2 million in the year ago period. Cost cutting efforts led to a (-14.3%) sequential decline in selling, general, and administrative expenses to $387.5 million. Inventory grew to $734.8 million versus $596.4 million a year ago so the Company can remain ahead of the curve meeting customer demand amid supply chain headwinds. The Company upgraded and modernized its systems by implementing SAP. The Company launched its NFT marketplace allowing gamers, collectors, creators and consumers to buy, sell, and trade NFTs. Incidentally, the head of its blockchain division Matthew Finestone left the Company on Sept. 12, 2022. GameStop ended the quarter with $908.9 million in cash and cash equivalents with no debt.

No Guidance, No Questions, No Answers… Click!

GameStop CEO Matt Furlong commented on the conference call, “In terms of an outlook, we're not providing formal guidance at this time. It is worth noting, however, that our ongoing engagement with key suppliers is positioning us to receive stronger supply of next-generation consoles in the months ahead. I want to finish by reinforcing that we're working to accomplish something unprecedented in our industry, transform a legacy brick-and-mortar retailer into a technology-led organization that meets customers' needs through stores, e-commerce properties in both digital marketplaces and new online communities. Our path to becoming a more diversified and tech-centric business is one that obviously carries risk and will take time. This said, we believe GameStop is a much stronger business than it was 18 months ago.” They took no questions and abruptly ended the call. They completely failed to address the elephant in the room, digital gaming. There were no answers to how GameStop would be able to compete with digital gaming which completely circumvents their operating model with DTC from game publishers and console makers. This may have further emboldened short-sellers to pile on.

FTX Egg on its Face

GameStop announced its partnership with FTX.US intended to introduce more of its customers to FTX’s marketplaces for digital assets. They will be selling FTX gift cards in stores and be GameStop’s preferred retail partner in the U.S. Since then, FTX has collapsed amid allegations of massive fraud, theft, hacks, and declaration of Chapter 11 bankruptcy on Nov. 11, 2022. There was a “hack” of $600 million missing crypto and a (-$8 billion) balance on the books. U.S crypto exchange Coinbase Global NASDAQ: COIN has denied any intent to purchase FTX.US.

Weekly Descending Triangle Chart 

The weekly candlestick chart indicates a descending triangle pattern comprised of lower highs and flat lots converging at an apex trigger breakdown point below $23.42. The pattern started in August 2022 and will eventually lead to a conclusion with the stock breaking down to retest multi-year lows or short-squeezing higher as it breaks out through the falling upper trendline above $33 and accelerated on the weekly market structure low (MSL) trigger above $37.12. The weekly 20-period exponential moving average (EMA) has been falling and acting as the immediate resistance at $28.85 with the weekly 50-period MA resistance at $31.18. The weekly stochastic has bottomed out and is attempting to bounce up through the 20-band which could trigger a short-squeeze if the volume picks up. So far, the volume has been relatively low since August 2022, which portends complacency.