While easy money was flowing, games and entertainment retailer GameStop Corp. (GME) was at the center of an unprecedented hype created by retail investors on social media forums. The stock market and the economy have been navigating rough waters since last year, so we wanted to examine the prospects of this fundamentally weak stock.

The hype created by an army of amateur traders in 2021 had less to do with the fundamentals of the company and more to do with the excitement of trading and a desire to short-squeeze professional speculators who were betting against it.

Although the market witnessed a rally even among the until-recently-beleaguered meme stocks on premature hopes of a pause in interest rate hikes, hotter-than-expected inflation data for January and the Fed’s resolve to continue its fight against inflation have been quick to spoil the party.

Let’s investigate whether GME’s fundamentals are strong enough to keep it and its backers in the game.

Weak Financials

For the third quarter of the fiscal year 2022 ended October 29, 2022, GME’s net sales decreased by 8.6% to $1.19 billion. During the same period, the company reported an adjusted operating loss of $95 million and an adjusted net loss of $93.4 million, or $0.31 per share.

Discouraging Analyst Estimates

Analysts expect GME’s revenue during the current fiscal year (ended January 2023) to come in at $5.88 billion, down 2.2% year-over-year. During the same period, the company’s loss per share is expected to widen by 15.2% year-over-year to $1.31.

Moreover, GME has missed the consensus EPS estimates in three of the trailing four quarters and is expected to keep reporting losses over the next two fiscals.

Unfavorable Price Action

GME’s stock has declined 40.5% over the past six months to close the last trading session at $20.52, below its 200-day moving average of $27.39.

Stretched Valuation

Despite the price decline, the stock is still trading at a valuation higher than in peers.

GME’s forward Price/Sales multiple of 1.06 is 12.1% above the industry average of 0.95. Similarly, its trailing-12-month Price/Book multiple of 5.01 compares unfavorably to the industry average of 2.33.

POWR Ratings Reflect Weakness

GME has an overall D rating, which equates to 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 an F grade for Value, consistent with its stretched valuation. It also has a D grade for Stability, justified by its 24-month beta of 1.59 and the spread between its 52-week high and 52-week low prices of $49.85 and $15.41, respectively.

GME has a D grade for Momentum and Sentiment, in sync with its bearish price action and bleak analyst estimates. Unsurprisingly, it is ranked penultimate of 45 stocks in the Specialty Retailers industry.

Beyond what has been discussed above, additional ratings for the Growth and Quality of GME can be found here.

Bottom Line

GME’s line of business is already in the process of being upended by online application stores run by technology incumbents, which use software-as-a-service to bring game titles directly to users. Moreover, many e-commerce platforms offer viable alternatives for purchasing merchandise and hardware sold by the company.

Hence, it is unclear how GME, with its own platform and fleet of e-commerce stores, would be able to differentiate itself from other players in this space and find its path to profitability.

Lack of focus is evident from the fact that on September 7, GME announced its partnership with FTX US to introduce more of its customers to the latter’s community and its marketplace for digital assets. Within two months of the announcement, the cryptocurrency exchange collapsed due to a liquidity crisis of the company’s token, FTT.

Hence, in view of its weak fundamentals and an increasingly uphill path to profitability, it may be wise to avoid buying the stock until its prospects become clearer.

Stocks to Consider Instead of GameStop Corp. (GME)

Unfortunately, the odds of GameStop outperforming in the weeks and months ahead are greatly compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these 3 A-rated (Strong Buy) or B-rated (Buy) stocks from the Specialty Retailers industry instead:

Ulta Beauty, Inc. (ULTA)

The ODP Corporation (ODP)

TravelCenters of America Inc. (TA)

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GME shares were trading at $19.71 per share on Thursday morning, down $0.81 (-3.95%). Year-to-date, GME has gained 6.77%, versus a 3.85% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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