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.

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.

The stock has declined 39.6% over the past year and 16.6% year-to-date to close its last trading session at $30.94. It has declined 10.2% 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 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.

Stretched Valuations

In terms of its forward EV/Sales, GME is trading at 1.39x, 21.5% higher than the industry average of 1.14x. The stock’s forward Price/Sales multiple of 1.45 is 59.1% higher than the industry average of 0.91.

Negative Profit Margins

GME’s trailing-12-month gross profit margin of 21.53% is 41% lower than the industry average of 36.49%. 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 5.99% and 2.04%.

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 15.38%, 6.91%, and 5.23%.

Unfavorable Bottom-line Growth Expectations

The consensus EPS estimates of a negative $0.38 and $0.37 for the quarters ending July and October 2022 indicate 100% and 5.7% year-over-year declines. 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 Growth grade of F in sync with its bleak bottom-line growth in the last reported quarter.

The stock has an F grade for Value and Sentiment, consistent with its high valuations and bleak bottom-line growth expectations.

In the 46-stock Specialty Retailers industry, it is ranked last.

Click here to see the additional POWR Ratings for GME (Momentum, Stability, and Quality).

View all the top stocks in the Specialty Retailers industry here.

Bottom Line

GME is focusing on strengthening its position in the NFT space. However, last week, it was reported that GME’s NFT marketplace’s daily revenue dropped below $4,000. This might be an indication that interest in the platform has been waning since its mid-July debut. On top of it, GME’s bleak bottom line 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, TravelCenters of America Inc. (TA - Get Rating) and Murphy USA Inc. (MUSA - Get Rating), which have an overall A (Strong Buy) rating, and Aeon Co., Ltd. (AONNY - Get Rating) and The ODP Corporation (ODP - Get Rating), which have an overall B (Buy) rating.

GME shares were trading at $31.53 per share on Monday morning, up $0.59 (+1.91%). Year-to-date, GME has declined -15.01%, versus a -14.70% 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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