Analysts at Wedbush have repeated their ‘Underperform’ rating on GameStop Corp (NYSE:GME) after the video game retailer’s quarterly sales disappointed and it unveiled plans to fast-track store closures.
“GameStop announced accelerated store closures with its earnings, but with no replacement strategy in sight, management indirectly indicates that it is no longer beholden to shareholder interests,” analysts wrote in a note to clients.
Wedbush also lowered its price target on the stock from $11 to $10, reflecting roughly $10 per share of net cash. Shares of GameStop traded down 15% at about $20 on Wednesday afternoon.
They believe the company’s shares trade at a level that ignores the many challenges it faces, including the shift from physical to digital game sales, the growth of subscription services, and its lack of strategy to enter new categories with growth potential.
“While we admire GameStop’s ability to manage operating losses, we think it would be just as reasonable for management to close all of its stores and operate as a bank,” analysts wrote.
“GameStop has roughly $10 per share in cash now, but without a hint of any strategy that would reasonably deploy capital, we do not see why shares trade at 2x cash.”
Revenue fell “dramatically” to $798 million in the second quarter below the consensus of $896 million, attributed by the analysts to store closures and more games being sold digitally.
Hardware and accessories revenue fell 24%, software revenue fell 48% and collectibles revenue was down 18%.
“We estimate that used hardware and software margins are at least 20 percentage points higher than on new product sales. This trend is likely to continue, but at the same time, GameStop committed to accelerating its store closures while secular trends are unlikely to shift in the near term,” analysts wrote.
“As a result, we expect ongoing revenue declines in the coming years to result in decreasing profitability.”