GameStop's demise could come later this decade, analyst says

By James Rogers

Videogame retailer missed analysts' top- and bottom-line estimates in its fourth-quarter results after market close Tuesday

GameStop Corp., which reported a significant sales decline its fourth-quarter results late Tuesday, could meet its demise before the end of this decade, according to analyst firm Wedbush.

GameStop (GME) missed analysts' top- and bottom-line estimates in its fourth-quarter results released after market close Tuesday, sending its stock plummeting in extended trading. The company's shares were down 14.7% in Wednesday morning trading, putting them on pace for their worst one-day decline since June 8, 2023, when they fell 17.89%, Dow Jones Market Data show.

"Despite a quarter that featured an extra week and modestly positive industry trends, GameStop delivered a large sales decline as it continues to deal with a mix shift in software sales, declining hardware sales, fewer large console releases, and the growth of subscription services," Wedbush analyst Michael Pachter wrote in a note released Wednesday. "The silver lining is that cash burn and losses appear to be manageable going forward. With its current cash balance, GameStop can weather $100 million of annual losses for a decade or more."

Related: GameStop shares slide 15% on top- and bottom-line misses for fourth quarter

The videogame retailer and original meme stock exited the quarter with cash and cash equivalents of $1.199 billion, compared with $1.21 billion at the end of the previous quarter.

However, Wedbush warned that should GameStop's revenues decline by $150 million to $200 million per year, it may have trouble trimming costs fast enough to stem its increasing losses. "If we're right, GameStop has a likely runway of no more than five years," Pachter said. "The demise of GameStop is outside the 12- month window we use for our price target, but we expect the company's demise at some point later this decade."

Citing the company's "lack of clear strategy to replace lost games sales," Pachter thinks a revenue decline of $150 million to $200 million per year is "highly likely."

Related: GameStop's stock jumps after billionaire investor Ryan Cohen named CEO

Wedbush lowered its GameStop price target to $5.60 from $6 and maintained its underperform rating.

"GameStop's disappointing [fourth-quarter] results underscore ongoing challenges to the company's retail business model," Baird Equity Research analyst Colin Sebastian wrote in a note released Tuesday. "Moreover, we have limited confidence in the company's ability to restore growth and drive further operating efficiency; however, we believe a smaller store footprint with a modernized consumer experience could eventually find an equilibrium point."

As of Feb. 3, GameStop had a total of 4,169 retail stores, down from 4,413 on Jan. 28, 2023.

Read: Ryan Cohen becomes GameStop CEO and social media reacts: 'Changing the paradigm on Wall Street'

"We expect bulls would point to new hardware and expected release of [Grand Theft Auto] 6 next year as upcoming catalysts," Sebastian added. "However, with management providing limited information and with ongoing business model concerns, we cannot recommend buying the stock at these levels."

The company saw major leadership changes last year. GameStop fired CEO Matthew Furlong in June and announced that its board had elected activist investor Ryan Cohen as executive chair. Cohen was named CEO in September, the latest chapter in his attempt to breathe new life into the company.

Last year, GameStop's board of directors also approved a new investment policy that lets the company invest in equity securities, among other investments. GameStop's board has given Cohen the authority to manage the investment portfolio.

Related: This is what we can expect to see from meme stocks in 2024

GameStop shares have fallen 24.5% in 2024, compared with the S&P 500 index's SPX gain of 9.4%. The stock is down more than 84% from its all-time closing high of $86.88 on Jan. 27, 2021, at the height of the meme-stock frenzy. GameStop's market capitalization is now $4.62 billion, a far cry from the company's meme-stock heyday in 2021, when its cap surpassed $17 billion.

Of two analysts surveyed by FactSet, one has a sell rating and one has an underweight rating for GameStop.

-James Rogers

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03-27-24 1045ET

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