GameStop Corp (NYSE:GME) could deliver a top line earnings beat for the holiday shopping quarter based on industry trends, analysts at Wedbush believe.
Shares of the video game retailer turned meme stock traded modestly lower at about $15 late morning on Tuesday after adding more than 15% on Monday ahead of the release of its fiscal 4Q results after the stock market closes.
The Wedbush analysts forecast quarterly sales of $2 billion, down 10.1% year-over-year.
The quarter includes an extra week, ending on February 3.
Earnings per share are seen improving from $0.16 in the year-ago quarter to $0.25.
“Overall industry sales were up modestly in 4Q 2023, with declining hardware sales offset by a quarter of strong software releases,” the analysts wrote.
“GameStop will benefit from industry trends during the quarter, but continued losses in market share and a mix shift towards digital likely led to underperformance in the quarter.”
In terms of profitability, the analysts believe this should benefit from a mix shift towards higher-margin software as well as continued cost discipline.
Should earnings be in line with guidance it would represent an 84% increase year-on-year and mark its first annual net profit since 2018.
Ryan Cohen, a former billionaire activist investor, was appointed as GameStop’s chief executive and chairman in September last year and has been vital in moving the group toward a profit.
During his tenure, Cohen has implemented a string of cost-cutting measures and is believed to be focused on streamlining operations.
One area that may see costs shaved is in its selling, general and administrative (SG&A) expenditure, with the figure having dropped from US$401 million in October 2022 to US$310 million a year later.
“GameStop’s bottom line should benefit from this mix shift towards software, as well as recent cost control measures like store closures and a reduction in labor, consulting, and marketing costs,” Wedbush's analysts wrote.
The analysts do not expect GameStop’s management team to provide detailed financial guidance for fiscal 2024.
“Management continues to be opaque, refusing to hold a conference call or Q&A session,” they pointed out. “In addition, the company has not provided sales or earnings guidance since 2019.”
They forecast earnings per share of $0.04 on sales of $5 billion for fiscal 2024, compared to the consensus estimates of $0.12 on $5.2 billion, respectively.
“We expect the Street’s estimates to come down gradually as GameStop continues to lose market share throughout fiscal 2024,” they wrote.
Regardless of the upside potential, the analysts wrote that GameStop continues to face obstacles in its return to sustained growth, namely the mix shift of game sales from physical to digital, increasing wallet share for microtransactions, the growth of subscription services, and the potential for hardware sales to gradually decline from streaming.
They also noted a lack of a clear strategy from GameStop to enter new categories they believe have compelling growth potential.
“The shares continue to trade at a level that fails to fully account for the many challenges ahead,” they noted.
The analysts have an ‘Underperform’ rating and a $6, 12-month price target on the stock.
- Updated with share price movement and details on Ryan Cohen -