Games and entertainment company GameStop Corp. (GME) in Grapevine, Tex., made headlines last year due to the dramatic rise in its share price on speculative trading by retail investors. But the stock could not sustain its premium price due to its weak fundamentals. However, GME has been gaining traction lately amid renewed investor interest in meme stocks.

GME shares have surged 53.4% in price since hitting their 52-week low of $77.58 on March 14, 2022, closing the last session at $142.39. The videogame retailer’s shares were also boosted by Chairman Ryan Cohen buying 100,000 shares of GME through his investment company RC Ventures, bringing his ownership to 11.9%. GME shares are up 18.3% over the past year and 14.3% over the past month.

The company intends to venture into the digital asset space with the launch of a non-fungible token (NFT) marketplace by the end of the second quarter of its fiscal year 2022. It also unveiled its partnership with Immutable X, which is intended to support the launch and provide up to $150 million in Immutable X IMX tokens upon achieving certain milestones. “We recognize that our special [connection] with gamers provides us a unique opportunity in the Web 3 and digital asset world,” GME said. The news has excited investors, lifting the stock significantly. The NFT marketplace is one of GME’s turnaround strategies, but it remains to be seen how it plays out amid heightened regulatory headwinds and its bleak fundamental position.

Here is what could shape GME’s performance in the near term:

NFTs Under Scrutiny by The U.S. Regulators

Regulations in the digital asset market have been intensifying over the past year, as the government seeks to regulate NFTs and cryptocurrencies, and NFTs could be subject to greater taxes. The United States Department of the Treasury has stated that the burgeoning NFT space could be a conduit for money laundering. Furthermore, the United States Securities and Exchange Commission (SEC) is reportedly investigating nonfungible token (NFT) creators and marketplaces for securities violations, investigating whether certain NFTs are being utilized to raise money like traditional securities. In addition, the U.S. Department of Justice unveiled a newly-formed National Cryptocurrency Enforcement Team last year.

Poor Profitability

GME’s 22.42% gross profit margin is 37.6% lower than the 35.91% industry average. Also, its EBITDA and net income margins of negative 4.36% and 6.34%, respectively, are substantially lower than the 12.69% and 6.61% industry averages.

Also, GME’s negative 37.40%, 10.90%, and 11.35% respective ROE, ROA, and ROTC compare with the 17.20%, 6.09%, and 7.91% industry averages.

Weak Bottom Line

For its fiscal fourth-quarter, ending Jan.29, 2022, GME’s net sales increased 6.2% year-over-year to $2.25 billion. However, its gross profit stood at $378.20 million, down 15.7% from its year-ago value. Also, its operating earnings came in at a negative $166.80 million, indicating a substantial decline from its $18.80 million prior-year quarter value. The company’s net loss and net loss per share came in at $147.50 million and $1.94, respectively, and compare with the net income per share of $80.50 million and $1.19 in the fourth quarter of the previous fiscal year.

Bleak Bottom Line Growth Projection

Analysts expect GME’s revenue for its fiscal first-quarter, ending April 30, 2022, to be $1.32 billion, indicating a 3.1% increase year-over-year. Also, its revenue is expected to grow 3% in the next quarter and 4.1% in the current fiscal year. However, the company’s EPS is expected to decline 170% in the current quarter and 66.1% in the following quarter. The negative $5.28 consensus EPS estimate for the current fiscal year indicates a 15.8% decrease from its year-ago value. Furthermore, its EPS is expected to decline 48.2% per annum over the next five years.

Lofty Valuation

In terms of forward EV/Sales, GME is currently trading at 1.40x, which is 13.2% higher than the 1.24x industry average. Also, its 1.72 forward Price/Sales ratio is 83.2% higher than the 0.94 industry average. Also, GME’s 6.33x forward Price/Book is 141% higher than the 2.63x industry average.

POWR Ratings Reflect This Bleak Prospects

GME has an overall F rating, which translates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

GME has an F grade for Value. Its stretched valuations justify this grade.

The stock also has an F grade for Stability, which is consistent with its negative 1.50 beta. Of the 47 stocks in the Specialty Retailers industry, GME is ranked the last.

Beyond what I have stated above, one can view GME’s grades for Growth, Sentiment, Momentum, and Quality here.

View the top-rated stocks in the Specialty Retailers industry here.

Bottom Line

GME stock looks substantially overvalued at its current price level, considering the company’s earnings growth and analysts’ growth forecasts. CNBC commentator Jim Cramer called GameStop a ‘Nothing Company.’ Although the company’s recent news releases about its NFT marketplace launch are raising investors’ interest, we think its shares could retreat again, given its weak fundamentals.

How Does GameStop Corp. (GME) Stack Up Against its Peers?

While GME has an overall POWR Rating of F, one might want to consider investing in the following Specialty Retailers stocks with a B (Buy) rating: Canadian Tire Corporation, Limited (CDNAF), Office Depot, Inc. (ODP), and TravelCenters of America LLC (TA).

GME shares fell $0.59 (-0.41%) in premarket trading Friday. Year-to-date, GME has declined -4.04%, versus a -4.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

More Resources for the Stocks in this Article