Specialty retailer GameStop Corp. (GME - Get Rating) 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.

GME’s stock jumped in extended trade after the company announced its 4-for-1 stock split earlier this month. The stock began trading on a split-adjusted basis on July 22. The company started trading at $38 per share, with shareholders of record receiving three additional shares for each one they previously owned. 

The stock has declined 13.1% since July 22. Over the past year, GME has declined 20% to close its last trading session at $33.84. However, it is up marginally intraday.

Here are the factors that could affect GME’s performance in the near term:

Recent NFT Marketplace Launch

On July 11, GME announced the launch of its non-fungible token (NFT) marketplace to enable gamers, creators, collectors, and other community members to buy, sell and trade NFTs. The non-custodial, Ethereum Layer 2-based marketplace is expected to expand functionally over time.

However, the NFT space comes with its own sets of concerns. Legislators are becoming increasingly aware of the risks, including issues around intellectual property, consumer welfare, and money laundering, which might ensue a regulatory crackdown.

Bleak Financial Growth

For the fiscal first quarter that ended April 30, GME’s net sales increased 8% year-over-year to $1.38 billion. However, gross profit decreased 9.6% from the prior-year quarter to $298.50 million. Adjusted net loss and adjusted loss per share rose 437.1% and 362.2% from the same period the prior year to $157.90 million and $2.08.

Negative Profit Margins

GME’s trailing-12-month gross profit margin of 21.53% is 42.2% lower than the industry average of 37.23%. Its trailing-12-month net income margin and levered FCF margin of a negative 7.73% and 9.37% are significantly lower than their respective industry averages of 6.58% and 3.25%.

The stock’s trailing-12-month ROE, ROTC, and ROA of negative 40.55%, 14.31%, and 15.11% compare with the industry averages of 16.60%, 7.10%, and 5.52%.

Unfavorable Bottom Line Growth Expectations

The consensus EPS estimate of a negative $0.37 for the quarter ending October 2022 indicates a 5.7% year-over-year decline. Moreover, GME has missed consensus EPS estimates in each of the trailing four quarters. Its EPS is expected to decline 48.2% per annum over the next five years.

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 a Value grade of F, consistent with its forward Price/Sales multiple of 1.58, 78% higher than the industry average of 0.89. In terms of its forward EV/Sales, it is trading at 1.52x, 36.9% higher than the industry average of 1.11x.

The stock also has a D grade for Growth and Quality, in sync with the bleak growth in its last reported quarter and negative profit 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

Although GME gained after its stock split announcement, it has declined since it began trading on a split-adjusted basis. Moreover, with increased scrutiny in the crypto market, its NFT marketplace growth might be impeded. On top of it, its negative ROE is concerning. 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, The ODP Corporation (ODP - Get Rating) and TravelCenters of America Inc. (TA - Get Rating), which have an overall A (Strong Buy) rating, and Murphy USA Inc. (MUSA - Get Rating) and Canadian Tire Corporation, Limited (CDNAF - Get Rating), which have an overall B (Buy) rating.

GME shares were trading at $33.37 per share on Friday morning, down $0.47 (-1.39%). Year-to-date, GME has declined -10.05%, versus a -13.11% 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. More...

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