GameStop’s Warning: Why GME Is An Obvious Gaming Investment

(CTN News) – Despite meme stock mania’s peak three years ago, GameStop (NYSE:GME) stock has seen a prolonged decline. I remember it like it was yesterday. A recent speculation has boosted GME stock by 17%.

In part, this rise can be attributed to Jerome Powell’s dovish comments (in comparison with what the market expected).

The expectation of potential rate cuts (instead of hikes) made many investors move up the risk curve. As a result of the outsized move, GameStop is about as high on the risk curve as you can get.

Following GameStop’s recent disappointing Q4 results, the stock dropped 18% as the retailer struggles to transition online. Earnings were 22 cents, below Wall Street estimates, with hardware/accessories down 12%, software down 31%. The decline in sales can be attributed to the purchase of online games.

Is trading this stock in either direction a smart move for investors? Let’s look at the very volatile price action in the stock.

Sales and GME stock are sliding

In addition to the earnings numbers, a recent SEC filing revealed the company has laid off some employees due to declining sales.

Even with plans and hopes to boost profitability with such cost-cutting measures, GME looks lousy.

Sales declined as a result of these cost-cutting initiatives in Q4 2023. In retail, particularly, it is hard to grow if you’re cutting headcount and locations. The company saw revenue of $1.7 billion for the quarter, down from $2.2 billion. Nintendo (OTCMKTS:NTDOY) and Microsoft (NASDAQ:MSFT) also shifted to digital downloads, reducing GameStop’s sales.

GameStop’s sales have been adversely affected by downloadable video games. The hardware sales at competitors like Nintendo, as well as GameStop, plummeted 7.8%. In addition, analysts and investors expressed concern about GME’s CEO Ryan Cohen’s plans to continue investing in cryptocurrencies and blockchain stocks.

Due to the company’s 39% decline since the beginning of 2024, they fear a greater decline will occur.

Based on Wedbush’s analysis, GameStop will cease to exist by 2029. The company must do more than cut costs, since revenue has fallen $150-$200 million a year.

Fundamental investors will continue to avoid this name until the cash burn stops and there’s a positive cash flow story to talk about.

Depreciating GameStop

In the holiday quarter, GameStop’s revenue dropped due to competition from e-commerce, reduced spending, and declining software sales. The impact of inflation on hardware, accessories, and collectible sales was significant.

It is almost exclusively influenced by speculative sentiment in the market at any given time as a meme stock.

There is no doubt that the value of the gaming market is declining. Almost all console operators sell these games online, and GameStop’s failure to shift to another business model makes me think of BlockBuster.

There are many people like me, so it’s not surprising that the stock is heavily shorted, which bodes well for short squeezes.

Given GameStop’s size compared to its true value, another squeeze is likely to be much harder from a technical standpoint.

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