Is a GameStop Turnaround Delusional or Reality?

Investors love a good turnaround story, but in a recession there are so many stocks to choose from. One company that needed a turnaround long before the arrival of COVID-19 was GameStop Corp. (NYSE: GME). It may seem impossible to comprehend in a rapidly changing video game and retail climate, but GameStop’s stock has come screaming back to life with almost no media coverage at all. Is this supposed to be a value stock, a turnaround play, or just another value trap?

GameStop is a retailer that was marked for death for longer than most investors would care to think about. At one point, short sellers had almost the entire free float of its shares short. Its short interest was 55.69 million shares as of mid-August, representing about 15 days to cover.

The bets against GameStop have been there long before the recession. It turns out that all of the online direct download delivery to gamers has been eliminating the need for customers to buy through GameStop. And all perceived efforts in prior years to take the company private or to find a buyer never materialized.

Apparently, rumors of GameStop’s death were exaggerated. The stock has now basically rallied 200% from its lows. It even closed up 1% during the September 3, 2020 trading day when the NASDAQ Composite fell a sharp 5% as profit taking was seen in all those market darlings.

While GameStop’s stock has been rallying, investors need to consider that the company is set to report its second quarter earnings results after the market closes on Wednesday, September 9, 2020. Even the most favorable stocks can be volatile ahead of and after their earnings report, and this recent recovery should probably not be viewed as a judgment for how that earnings report will look.

One major catalyst that has also been boosting interest in GameStop and other video game players is the coming Xbox and PlayStation console refreshes. It has been years since a new release of gaming consoles has been seen, and this has been a point of interest in the sector.

Now GameStop has a new key shareholder that has driven interest. RC Ventures LLC took a 9% stake that was reported at the end of August, and this is manged by Chewy’s co-founder Ryan Cohen. This was the more recent catalyst that created so much interest, but GameStop has been down and out for so long that investors may have other ambitions here.

Some speculation has been out that GameStop’s business may start to look profitable again. Zacks has shown that GameStop is expected to report a quarterly loss of $1.27 per share, and the firm sees revenues being down about 27% year-over-year at $937.53 million. Options trading has also picked up with the recent trading activity in both puts and calls.

There is no way to know if GameStop’s earnings report will be better than expected. The company has a mixed track record of having results being not as bad as expected. That said, revenues covering calendar year 2017 (fiscal year-end in January of 2018) of $9.22 billion fell to $8.28 billion the following year and were down to $6.47 billion last year.

Wall Street analyst have zero love for GameStop. This was better than a $50 stock in 2013, and it has basically slid lower and lower each year. Almost none of the analyst calls we have seen since the start of 2019 have come with very convincing “Buy” or “Outperform” ratings.

One longer-term uncertainty that will persist with GameStop is exactly what happens to the retailing model after the video game console refresh cycle peaks. As of the start of September, momentum investors have not wanted to bother thinking about next year if they can make a quick buck today.

Perhaps there are stronger opportunities in esports that GameStop can win from. There is also an opportunity over inventory management as its cash needs have been moved further out.

GameStop closed up 1.4% at $7.82 during Thursday’s big market sell-off. Its shares had hit a high of $8.45, and its lowest closing price during the panic-selling zenith was $2.80.

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