GameStop's 'meme'-like stock rally continues as earnings draw near

By James Rogers

Company set to report third-quarter results after the closing bell Wednesday

GameStop Corp. announced last week that it will report third-quarter results after market close on Wednesday, sparking a "meme"-like rally in the videogame retailer's stock this week.

Shares of the original meme-stock darling surged this week, enjoying their best two-day gain in eight months before pulling back Thursday.

GameStop (GME) was also a top trending symbol on Stocktwits, a social platform for investors and traders, at Wednesday's close.

Related: GameStop stock's massive rally driven by fresh wave of speculative bets

"$GME up 10% today on no real news," Stocktwits wrote Tuesday on X. "Is risk back on in markets?"

The stock ended Friday's session up 5.2%, after ending Thursday's session down 10.5%.

"Message activity and the number of users participating in the conversation on the Stocktwits $GME stream have remained elevated for the last six months," Tom Bruni, the lead writer of Stocktwits' Daily Rip newsletter, told MarketWatch. "Additionally, sentiment has leaned toward bullish and has accelerated to extremely bullish, given this week's sharp rise."

From the archives (September 2023): GameStop's stock jumps after results top estimates, helped by international gains

"Some speculate that this week's jump was driven by retail investors retaking interest in the stock, but our data suggests that their interest never left," he added. "There's still a dedicated community talking about GameStop because they believe in the longer-term turnaround story for the business. The company's earnings report in September showed that its cost-cutting strategy is paying dividends, with sales stabilizing."

GameStop beat expectations when it reported second-quarter results in early September, boosted by international sales and what the company described as "a significant software release."

Short interest is at roughly 20% of the stock's outstanding float, with it taking about two to three weeks of trading activity to fully cover those positions at current trading volumes, according to Stocktwits.

"Given those factors and stabilizing business fundamentals, this week's uptick appears to be an institution either covering their shorts or establishing a position on the long side ahead of next week's earnings," Bruni said. "We'll have to wait and see what the future short interest data or regulatory filing indicates, but it's clear these trading volumes are not just individual traders."

From the archives (September 2023): GameStop's stock soars after activist investor Ryan Cohen named CEO

"Should the rally continue, we'd expect more short-term-oriented traders to join the conversation as they look to ride the momentum," he added.

GameStop, like fellow meme-stock darling AMC Entertainment Holdings Inc. (AMC), was a major beneficiary of the meme-stock buying frenzy in January 2021. Boosted by the WallStreetBets crowd on Reddit, the struggling videogame retailer's stock soared, rising more than 1,200% between January and March 2021 as the company's market cap surpassed $17 billion. But shares have pulled back significantly since then, and GameStop's market cap is now $4.4 billion.

While GameStop's second-quarter results beat expectations, Wedbush analyst Michael Pachter said in September that the company faces a number of obstacles to return to growth. These include a continuing shift of game sales from physical to digital, declining hardware sales, far fewer big console game releases going forward and a noticeable shift to PC games, most of which are delivered digitally. The analyst also highlighted growth of gaming subscription services as an obstacle. Set against this backdrop, Wedbush lowered its GameStop price target to $6 from $6.20.

Related: GameStop stock's massive rally driven by fresh wave of speculative bets

The company has also seen major leadership changes this year. Activist investor Ryan Cohen was named CEO of GameStop in late September, marking the latest chapter in his attempt to breathe new life into the company. GameStop fired then CEO Matthew Furlong in June and said that its board had elected Cohen as its executive chairman.

Cohen, the co-founder and former CEO of Chewy Inc. (CHWY), made his first investment in GameStop in August 2020 via his investment firm, RC Ventures. News of Cohen's 9% stake in the gaming retailer sent the stock surging at the time. The activist investor quickly began pushing for an overhaul of GameStop, with a focus on digital sales, and he joined the company's board in January 2021.

While Cohen's supporters and fans of GameStop took to social media to celebrate his appointment as CEO, Wedbush analyst Pachter was much less effusive. "It means business as usual, which is to say a slow bleed of cash with no clear alternatives to reverse the continuing decline in physical game sales and store traffic," he told MarketWatch in late September.

Related: It's the end for the ETF devoted to meme stocks, which has fallen 60% since inception

Here are the key numbers to look for ahead of Wednesday's report.

Earnings: The FactSet consensus calls for an adjusted loss of 8 cents a share, after a loss of 31 cents a share in the same period a year earlier.

Revenue: Analysts tracked by FactSet expect the videogame retailer to report fiscal-third-quarter revenue of $1.182 billion, down slightly from $1.186 billion in the same period last year.

Stock movement: Last quarter, GameStock's stock rose 0.8% on the day following its results. GameStop shares have fallen 17.2% in 2023, compared with the S&P 500 index's SPX gain of 19.7%.

-James Rogers

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12-02-23 1127ET

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