Specialty retailer GameStop Corp. (GME) is a game and entertainment products provider operating through its various stores and e-commerce properties. The company sells new and pre-owned gaming platforms, accessories, new and pre-owned gaming software, and in-game digital currency.
Recently, GME announced its partnership with FTX US to increase its presence in the cryptocurrency space following its launch of an NFT marketplace. The company is expected to start selling FTX gift cards at some of its stores. However, Wedbush analyst Michael Pachter believes its FTX partnership “is unlikely to yield meaningful revenue or profit.”
The stock has declined 38.6% over the past year and 21.2% year-to-date to close its last trading session at $29.24. However, it has gained 16.2% over the past five days.
Here are the factors that could affect GME’s performance in the near term:
Bleak Financial Growth
For the fiscal second quarter that ended July 30, GME’s net sales decreased 4% year-over-year to $1.14 billion. Adjusted operating loss rose 106.6% from the prior-year quarter to $106.20 million. Adjusted net loss and adjusted loss per share rose 94.7% and 84.2% from the same period the prior year to $107.10 million and $0.35.
Stretched Valuations
In terms of its forward EV/Sales, GME is trading at 1.35x, 20.2% higher than the industry average of 1.12x. The stock’s forward Price/Sales multiple of 1.40 is 54% higher than the industry average of 0.91.
Negative Profit Margins
GME’s trailing-12-month gross profit margin of 21.06% is 42% lower than the industry average of 36.32%. Its trailing-12-month net income margin and levered FCF margin of a negative 8.57% and 11.50% are significantly lower than their respective industry averages of 5.86% and 1.54%.
The stock’s trailing-12-month ROE, ROTC, and ROA of negative 32.51%, 13.88%, and 18.56% compare with the industry averages of 15.28%, 7.01%, and 5.14%.
POWR Ratings Reflect Bleak Prospects
GME’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
GME has an F grade for Value, consistent with its high valuations.
The stock has a Growth and Quality grade of D in sync with its bleak bottom line growth in the last reported quarter and its bleak profitability margins.
In the 46-stock Specialty Retailers industry, it is ranked last.
Click here to see the additional POWR Ratings for GME (Momentum, Stability, and Sentiment).
View all the top stocks in the Specialty Retailers industry here.
Bottom Line
It looks uncertain whether the FTX partnership would yield significant revenue for GME. On top of it, GME’s bleak bottom-line positioning is worrisome. Moreover, analysts expect its EPS to decline 20.2% year-over-year in the current fiscal year. Hence, I think the stock might be best avoided now.
How Does GameStop Corp. (GME) Stack Up Against its Peers?
While GME has an overall POWR Rating of F, one might consider looking at its industry peers, TravelCenters of America Inc. (TA) and The ODP Corporation (ODP), which have an overall A (Strong Buy) rating, and NEXT plc (NXGPY) and Canadian Tire Corporation, Limited (CDNAF), which have an overall B (Buy) rating.
GME shares fell $0.18 (-0.62%) in premarket trading Tuesday. Year-to-date, GME has declined -21.18%, versus a -12.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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