MW GameStop has 'virtually no chance' of returning to profitability in its core business, says Wedbush
By James Rogers
GameStop shares jumped following the videogame retailer and original meme stock's third-quarter results this week
GameStop Corp. shares jumped following the video game retailer's third-quarter results this week, although analyst firm Wedbush thinks that a return to profitability in the company's core business is unlikely.
"GameStop has just over $10 per share in cash generating an impressive 4% + of annual income, but no clear strategy to reasonably deploy capital," wrote Wedbush analyst Michael Pachter, in a note released Wednesday. "The company's shares trade at 3x cash, while its operations continue to lose money," he added.
The analyst noted that GameStop $(GME)$ has accelerated store closures in an attempt to save its way to prosperity. "Its plans to enter the trading card business are striking in their lack of specificity; with no clear strategy to leverage its store base, management appears to be planning a withdrawal from its core business," he wrote. Pachter added that GameStop appears to be hoping that its entry into the "wildly fragmented" trading card business can drive it to profitability. However, he wrote that GameStop has an "utter lack of competitive advantage in the new business."
Related: GameStop's stock jumps on surprise third-quarter profit
"GameStop has virtually no chance of returning to profitability in its core business, and its entry into the trading card business follows failed attempts at an omnichannel strategy and at NFT trading," the analyst wrote.
GameStop has not yet responded to a request for comment on this story.
In October GameStop announced a collaboration with Collectors Holdings Inc.'s Professional Sports Authenticator division, which offers trading card and autograph authentication and grading services. GameStop has become an authorized PSA dealer and PSA is providing authentication and grading services through select GameStop stores across the U.S.
Related: GameStop's stock is trading at a level that ignores the company's challenges, says Wedbush
Last month GameStop tightened these links when it appointed Collectors' CEO Nat Turner to the company's board.
Lifted by GameStop's surprise third-quarter profit, the company's stock ended Wednesday's session up 7.6%, registering their biggest daily percentage gain since Nov. 11, when they gained 9.6%. The stock, which ended Wednesday's session at $28.97, is up 0.4% in premarket trades.
But Wedbush's Pachter pointed to the company's third-quarter operating loss. GameStop reported an operating loss of $33.4 million, compared with an operating loss of $14.7 million in the prior year's quarter. On an adjusted basis, GameStop's operating loss was $24.6 million, compared with an operating loss of $13.1 million in the same period last year.
Related: GameStop appoints Nat Turner to board, tightens links with Collectors
"While GameStop has over $10 per share in cash, its continuing operating losses result in a subpar return, and its stock should reflect that fact," wrote Wedbush's Pachter. "As such, we cannot recommend shares of GME." Wedbush reiterated its underperform rating and $10 price target for GameStop.
Of two analysts surveyed by FactSet, one has an underweight rating and one has a sell rating for GameStop.
GameStop ended the quarter with cash, cash equivalents and marketable securities of $4.616 billion, up from $929.2 million at the end of the same period last year.
Related: GameStop CEO Ryan Cohen is happy about Trump's victory. The stock is climbing.
Last year, GameStop's board of directors approved a new investment policy permitting the company to invest in equity securities, among other investments. The board gave Cohen the authority to manage the investment portfolio.
Earlier this year GameStop shares were boosted by the return to social media of influential trader Keith Gill, also known as Roaring Kitty, who was a pivotal figure in the 2021 meme-stock frenzy. GameStop's stock is up 65.3% in 2024, outpacing the S&P 500 index's SPX gain of 27.6%.
-James Rogers
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December 12, 2024 08:44 ET (13:44 GMT)
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