What To Make Of GameStop (NYSE: GME) Earnings

It looks like investors of GameStop (NYSE: GME) are in for a rocky end to the week after the video game retailer released their Q2 earnings report last night. Despite revenue topping expectations and coming in 25% higher than where it was the same time last year, shares of the Texas headquartered company still dipped more than 10% in after-hours trading. 
The fact that EPS was a little light compared to what analysts had been expecting didn’t help, though the GAAP EPS print of -$0.85 was still an improvement on Q1.  The company’s sales for the quarter were also up 25% year over year with each of the three core segments (hardware and accessories, software, collectibles) coming in ahead of expectations. 

Long Term Growth

In their address to shareholders, management was keen to make it clear that they’re investing in long-term growth initiatives such as the expansion of their product catalog, improved fulfillment capabilities, and enhanced talent. The $1.8 billion in cash that GameStop ended the quarter with will go a long way in helping their initiatives bear dividends. 

Despite the strong fundamental movement, management maintained the company’s suspension of forward guidance, but it’s fair to think that like last quarter they “believe total net sales is the most appropriate metric to evaluate performance at this time”. If investors adhere to this logic, then GameStop is going in the right direction. 

So what does this mean for the direction GameStop shares will go in once the immediate reaction to last night’s numbers is over? A look at their performance so far this year yields some clues. We probably all remember the headlines they garnered back in January and February with their Reddit-fuelled short squeeze, but they’ve remained impressively buoyant since, even as their daily trading volume has normalized. After jumping from $20 to almost $500 in less than a month they’d have been forgiven for retracing most of it, and while they did initially, since the end of February they’ve barely traded below $150. 

Technical Analysis

It could be said their chart is showing a dangerous triple top, made up of where shares tapped out in February, March, and June, but for all that the bears haven’t been able to bring them back down to their pre-hype levels. And if anything, the higher lows that have been forming since February bode well for the rest of the year. If buyers are happy to step in sooner each time there’s a wobble, all it really takes to set alight a fresh fire is some surprising good news or a banner beat on earnings. 

The latter may not have come this week, but at least the report had enough in it to justify existing positions continuing to be held. The former could come in the form of a partnership with GameStop’s bedfellow in meme stocks, AMC Entertainment (NYSE: AMC). Their CEO let slip yesterday that the companies have initiated contact regarding a potential partnership, but wouldn’t share more than that. 

In the meantime, if shares are going to be sent down to where they were two weeks ago, fair enough. Investors with a long term time horizon could do worse than pick some up at what could easily turn out to be a considerable discount. As reported earlier this month, the S&P Dow Jones Indices committee will be making a decision on GameStop reentering the S&P 500 index before the end of the year, a move that would confirm its post short squeeze maturing into a respectable stock. 

Getting Involved

GameStop shares still have a few hearts to win over in the meantime, such as the folks in Wedbush Securities who reiterated their Underperform rating in advance of the company’s earnings yesterday. Michael Pachter and his team are bullish on the company’s trend towards profitability but remain skeptical about where the share price is compared to the fundamentals of the business. 

Still, it's been close to eight months now since the short squeeze and shares have refused to trickle lower on the reduced volume as many short squeezed stocks of the past have. Wedbush and their fellow glass-half-empty peers will soon have to start asking themselves at what point the narrative shifts from what happened eight months ago to what will happen in the next eight months.