Video game retailer GameStop Corporation (GME) in Grapevine, Tex., made headlines last year as retail investors triggered a first-of-its-kind short squeeze. The stock rallied more than 1,625% in January 2021, officially kick-starting the “meme craze.”

However, various macroeconomic headwinds, surging volatility, and extended market weakness caused GME to retreat since, declining 9.1% in price over the past year. Investors have been looking for relatively safe investment bets amid the volatile market. Over the past six months, GME shares have plummeted 13.8% to close yesterday’s trading session at $151.95.

Nevertheless, the stock came back into favor earlier this month, as GME Chairman Ryan Cohen bought 100,000 shares of the company. As the equity markets stabilize after the Fed’s highly anticipated interest rate hike to curb inflation and the Russia-Ukraine war stalemate, retail investors have renewed their interest in meme stocks, as evidenced by the recent GME rally. Since Cohen’s investment news was released on March 22, GME stock has surged 58.2% in price. In addition, the stock soared 72% over the past week.

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

Business Transformation

Cohen has been focusing on transforming GME from a brick-and-mortar video game retailer to the “Amazon” of gaming. He has been focusing on restructuring the company’s operations to benefit from the industry tailwinds, given the fast-paced growth in the online gaming space.

Regarding this, Cohen said, “GameStop’s challenges stem from internal intransigence and an unwillingness to rapidly embrace the digital economy … GameStop needs to evolve into a technology company that delights gamers and delivers exceptional digital experiences—not remain a video game retailer that overprioritizes its brick-and-mortar footprint and stumbles around the online ecosystem.”

While this structural transformation might benefit the company in the long run, GME’s working capital expenses and CapEx are expected to skyrocket in the near term. Furthermore, with immense competition in the gaming space with the amalgamation of industry leaders such as Microsoft and Activision Blizzard, GME’s aim to become the Amazon of gaming seems far-fetched now.

Bleak Financials

GME’s net sales rose 6.2% year-over-year to $2.25 billion in its  fiscal fourth quarter, ended Jan.29, 2022. However, the company’s gross profit declined 15.7% from the same period last year to $378.20 million. Its operating loss came in at $166.80 million, compared to an $18.80 million gain reported in the prior-year quarter.

Its net loss widened 283.2% from its year-ago value to $147.50 million. Its loss per share was  $1.94, compared to $1.19 earnings reported in the same period last year. And its net operating cash outflow worsened 451.1% year-over-year to $434.30 million for the fiscal year, ended Jan. 29, 2022.

Consensus Rating and Price Target Indicate Potential Downside

Between the two Wall Street analysts who rated GME, one rated Hold while one rated it Sell. The 12-month median price target of $65.00 indicates a 57.2% potential downside from Friday’s closing price of $151.95. The price targets range from a low of $30.00 to a high of $100.00.

POWR Ratings Reflect Bleak Prospects

GME has an overall F rating, which equates 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, Stability, and Sentiment. The stock is currently trading 1.85 times its forward sales, 98.4% higher than the industry average of 0.93, in sync with the Value grade. In addition, GME’s negative 1.50 beta justifies the Stability grade. Furthermore, analysts expect the company’s EPS to remain negative until at least 2024, in sync with the Sentiment grade.

Of the 47 stocks in the Specialty Retailers industry, GME is ranked last.

Beyond what I have stated above, view GME ratings for Growth, Quality, and Momentum here.

Bottom Line

GME has been preparing to venture into the NFT space through its partnership with L2 startup Immutable X. The company plans to set up an NFT marketplace by July end of this year, which would allow gamers to shop from billions of low-cost in-game assets which can be bought and sold quickly.

While the NFT marketplace launch is a milestone achievement for GME, the increased regulations surrounding cryptocurrencies and the high taxation levied on NFTs are a cause for concern. Also, as the international markets remain volatile given the unresolved Russia-Ukraine war and unstable commodity markets, analysts expect high-risk meme stocks to retreat soon. Thus, GME is best avoided now.

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

While GME has an F rating in our proprietary rating system, one might want to consider looking at its industry peers, Canadian Tire Corporation, Limited (CDNAF), TravelCenters of America LLC (TA), and Next Plc (NXGPY), which have a B (Buy) rating.

GME shares were trading at $169.19 per share on Monday afternoon, up $17.24 (+11.35%). Year-to-date, GME has gained 14.02%, versus a -4.73% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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