GameStop Corp. (GME) is a gaming and entertainment products retailer with a network of stores and e-commerce sites. The firm provides new and used gaming consoles, peripherals, new and used gaming software, and in-game digital money.

Its shares are down 31.9% over the past year and 12.4% year-to-date to close yesterday’s trading session at $130.09. In addition, it is currently trading 49.1% below its 52-week high of 255.69, which it hit on November 03, 2021.

GME has struggled to generate income in recent years as consumer preferences have shifted. The corporation recorded a net loss of $157.9 million in the first quarter, significantly wider than the previous year’s loss of $66.8 million. 

Also, in a recent managerial restructuring, the corporation announced the departure of its Chief Financial Officer, Mike Recupero. Meanwhile, the company intends to slash jobs to curtail costs. In an internal memo, the firm stated that it was cutting its workforce to “keep things simple and operate nimbly.”

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

Inadequate Financials

GME’s revenue increased 7.9% year-over-year to $1.38 billion for the first quarter ended April 30, 2022. Its operating loss grew 276.7% from the year-ago value to $153.7 million.

The company’s net loss surged 136.4% from the prior-year quarter to $157.9 million. In addition, its net cash used in operating activities came in at $303.9 million, representing a year-over-year increase of 1516.5%.

Negative Profit Margins

GME’s trailing-12-month gross profit margin of 21.5% is 41.3% lower than the industry average of 36.7%. Also, its trailing-12-month ROA, ROC, and net income margin are negative 15.1%, 14.3%, and 7.7%, respectively. Moreover, its trailing-12-month negative EBITDA margin of 5.6% compares to its industry average of 12.1%.

Premium Valuation

In terms of forward EV/Sales, the stock is currently trading at 1.44x, 35.9% higher than the industry average of 1.06x. Also, its forward Price/Sales of 1.52x is 81.7% higher than the industry average of 0.84x. Moreover, GME’s trailing-12-month Price/Book of 6.77x is 243.9% higher than the industry average of 1.97x.

Consensus Rating and Price Target Indicate Potential Downside

Of the two Wall Street analysts that rated GME, one rated it Sell, and the other rated it Hold. The 12-month median price target of $70.00 indicates a 46.2% potential downside. The price targets range from a low of $30.00 to a high of $110.00.

POWR Ratings Reflect Bleak Outlook

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

Our proprietary rating system also evaluates each stock based on eight different categories. GME has a D for Value and Sentiment. The stock’s higher-than-industry valuation is consistent with the Value grade. In addition, consensus rating and price targets are in sync with the Sentiment grade.

Of the 46 stocks in the C-rated Specialty Retailers industry, GME is ranked last.

Beyond what I’ve stated above, you can view GME ratings for Stability, Growth, Momentum, and Quality here.

Bottom Line

The company’s widening losses and the recent announcement about reducing its workforce to save costs have raised concerns over its prospects. Analysts expect its EPS to decline at the rate of 48.2% per annum over the next five years.

In addition, given that the consensus price estimates indicate a potential downside for the stock, we think the stock is best avoided now.

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

While GME has an overall F rating, one might want to consider its industry peers, ODP Corp. (ODP) and TravelCenters of America LLC (TA), which have an overall A (Strong Buy) rating.

GME shares rose $1.35 (+1.04%) in premarket trading Tuesday. Year-to-date, GME has declined -11.72%, versus a -18.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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