GameStop Corp (NYSE:GME) faces several short- and long-term headwinds that are likely to weigh on its performance, leading to analysts at Wedbush maintaining an ‘Underperform’ rating on the stock, with a 12-month price target of $5.30 — against the roughly $16/$17 the stock currently trades at.
Ahead of the release of its fourth quarter fiscal 2023 results after the bell on Tuesday, they said the Street appears to be in a “generous mood for its holiday quarter estimates.”
While the Wedbush analysts have penciled in a 4.6% year-over-year (y-o-y) decline in net sales to $2.15 billion and a $0.18 loss per share, consensus estimates are for a 3.3% decline in net sales to $2.18 billion and a $0.13 loss per share.
“There were several record-breaking software (SW) releases into the Black Friday period. Activision Blizzard’s Call of Duty: Modern Warfare II launched just before the end of GameStop’s fiscal third quarter, blunting its impact on Q4,” the analysts wrote in a client note. “In addition, Nintendo’s new Pokémon games were very popular, but overall Switch SW unit sell-in was down by roughly 10% for the December quarter."
"On the HW (hardware) side, the Switch saw weaker-than-expected sell-through, while Microsoft’s Xbox HW revenue declined by 13%. Sony’s PlayStation 5 had a strong holiday quarter, but our bias is that a significant percentage of those units were sold directly to consumers, bypassing retail outlets,” they added.
Underwhelming NFT marketplace stats
GameStop’s non-fungible tokens (NFT) marketplace stats continue to be underwhelming, the analysts said.
Additionally, they noted that foreign currency translation proved to be a roughly $50 million revenue headwind in the third quarter. Also, there was another round of layoffs in December.
On a positive note, they said collectibles may have fared well.
“Taken together, the y-o-y top-line decline could be well below the Street, which could also hurt EPS despite the push to achieve profitability in the near term,” the analysts wrote.
Long-term headwinds include potential liquidity challenges and changing gamer preferences, with greater appetites for cloud, digital, mobile, and subscription.
“We expect significant cash burn through FY23 at least, eventually forcing the company to issue more equity,” the analysts said. “The shares remain at trading levels that are disconnected from the fundamentals of the business due to irrational support from some retail investors.”
Contact the author at stephen.gunnion@proactiveinvestors.com