Stock Markets Analysis & Opinion

Gamestop Stock Heading Back to $10 or Lower

  • Gamestop gamed its market by announcing weak preliminary results for Q1.
  • Gamestop announced a mixed-shelf filing that threatens dilution.
  • The shares are moving lower and heading back to $10.
  • GameStop (NYSE:GME) proved why it is a fool's game for investors. The company issued weak guidance and announced a share sale that has the market moving lower. The move lower is significant in light of the recent run-up in share prices. The meme-driven spike in shares sent the stock up by triple digits but has already peaked, showing significant resistance to higher prices. The takeaway is that some made money on the upswing, but more are making money on the downswing. Short-sellers are back in force and will keep this dog down.

    Gamestop Issues Preliminary Q1 Results

    Gamestop got the market’s attention by releasing preliminary figures for Q1. The company expects revenue to range from $872 to $892 million compared to the $1.05 billion forecasted by analysts. The take is roughly 30% lower than the previous year and a sign of impending doom for the business.

    The latest retail sales data shows consumers are being squeezed by inflation and high interest rates. The retail sales figure was up 3% compared to last year but fell short of inflation, suggesting a decline in volume that will likely accelerate. Because GME’s merchandise is highly discretionary consumer tech and reliant on flush, happy consumers, there is no reason to think business will pick up soon. Q1 results are slated for release in early June.

    The balance sheet is still OK, but the cash burn continues. The company lowered its SG&A expenses but not sufficiently to offset deleveraging. The net result is about $35 million in losses, leaving the cash balance near $1.083 billion. This is enough to sustain operations at the current burn rate for several years, but it is not inexhaustible. Eventually, the company must make hard decisions and may choose to liquidate.

    Dilution is a threat to investors. The company announced the filing of a mixed-shelf offering alongside the guidance. The mixed shelf does not guarantee the company will sell shares or other dilutive offerings, but it sets the stage for them to do so. There is no amount listed, so sales could be significant. As it is, the company’s efforts increased the average share count by about 0.4% as of the last report.

    Still No Love For Gamestop

    Gamestop has a loyal following in the investment community but not enough love from the broad market to move the needle in any direction but down. There is only one analyst, Wedbush, rating the stock, and that is a Strong Sell with a price target of $5.60, much lower than today. Institutional activity shows some buying, but it is even suspect, given the company's high short interest and speculative nature. They own about 30%. Insiders own another 12% but have mostly sold over the last two years. The last significant buying was in Q2 2023 when CEO Ryna Cohen made his investment in the operation.

    Short interest is the real concern. The spike in share prices has burned many short-sellers, but they have likely repositioned by now. The short interest rate was over 20% in the last report and is likely higher now.

    The Gamestop Technical Outlook is Bearish

    Gamestop’s price action shows significant resistance to prices above $40. The candle formed by the spike and plunge is a wickedly large Shooting Star-type candle that indicates any move above $30 is unlikely to be sustained. The candle confirms resistance at eight other price points and suggests the downtrend is intact. The most likely outcome is that price action will continue to retreat and may return to the $10 level soon.

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