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GameStop ‘s first profitable quarter since January 2021 sent the stock surging.
GameStop stock (ticker: GME) rose 35% to $23.87 on Wednesday. Shares traded at $27 earlier in the session. The gain was GameStop’s largest percentage increase since March 25, 2021, when it rose 53%, according to Dow Jones Market Data.
On Tuesday evening, the company reported earnings of 16 cents a share, well above the loss of 16 cents a share Wall Street analysts were expecting. The report initially sent shares of AMC Entertainment Holdings (AMC) and Bed Bath & Beyond (BBBY) higher, but both closed down for day as the broader market dipped.
Ihor Dusaniwsky, managing director of predictive analytics at short-selling data firm S3 Partners, told Barron’s that some 56.1 million GameStop shares were recently sold short. A short seller borrows shares, then immediately sells them, with the goal of buying the same amount of shares at a lower price in the future. If the stock falls, the difference is their profit, less borrowing fees.
“I expect a wave of short covering tomorrow if this price level holds, and the short squeeze begins,” Dusaniwsky said as shares surged in after-hours trading Tuesday.
Critics of GameStop argue the company’s business of selling preowned videogame discs is declining, but the stock is supported by enthusiastic retail investors hoping to rekindle January 2021’s meme-stock surge. Though GameStop’s software sales were down 15% year over year to $670.4 million, its efforts to rein in costs and its stronger sales of hardware and collectibles surprised Wall Street.
Jefferies analyst Andrew Uerkwitz maintained a Hold rating on the stock, with a stock-price target of $20, in a research note published after the report Tuesday. He said GameStop showed progress cutting costs, though he noted overall sales were down 1% year over year. He pointed to increased availability of newer videogame consoles, such as the PlayStation 5, as a factor that benefited the retailer.
If GameStop can string together more profitable quarters, it can operate longer without raising cash through fresh stock sales. Of course, even before its meme-stock status, the January quarter—which includes the holiday season—was always when the company made the bulk of its annual profits.
Though GameStop has attracted similar retail investor enthusiasm to AMC and Bed Bath & Beyond, profitability could help it stand apart. The company didn’t provide an outlook for the current quarter. Wall Street will likely want to see sustainable profits before it changes its tune on the retailer.
Uerkwitz forecasts an earnings before interest, taxes, depreciation, and amortization loss of $62 million for the fiscal year ending in January 2024. That is an improvement from his prior estimate of $79 million.
“The early signs on costs are encouraging, and [we] expect profitability again in [the January 2024 quarter], but want to see the leverage in the non-holiday quarters before modeling full-year positive Ebitda,” he wrote.
Wedbush analyst Michael Pachter, who last week maintained an Underperform rating and $5.30 price target on GameStop shares, still isn’t optimistic.
“They cut costs a lot, which is an encouraging sign, but it’s not likely that they can save their way to prosperity,” he told Barron’s. “I think the results are a one-off and expect a return to losses going forward.”
For now, though, it was the meme stock crowd taking a victory lap.
Write to Connor Smith at [email protected] and Adam Clark at [email protected]
