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Does it still pay to play GameStop (GME)? The brick-and-mortar retailer has seen market cap surge from under $400 million a year ago to nearly $15 billion today. Still one of the most talked-about names in the market, GME stock has soared more than 80% in six months and more than 1000% year to date. And after rising more than 35% over the past month, including 5% gains this week, investors want to know how much better can things get.
The company can answer that important question on Wednesday when it reports second quarter fiscal 2021 earnings result after the closing bell. Enthusiasm surrounding the arrival of new CEO Ryan Cohen, Chewy (CHWY) founder, who is charged with turning the GameStop into an e-commerce power, has not waned. This is even though the brick-and-mortar retailer has yet to show financial success in the digital realm. Still struggling to grow, GameStop has not traded on fundamentals.
As such, investors want to know whether the company has a working business model beyond the pervasive social media-driven stock mania. The stock still ranks among the top five in daily discussions on WallStreetBets, and the market wants GameStop to show that it is more than just a “meme stock,” fueled by Reddit-induced euphoria. On Wednesday the company can steer the conversation towards fundamentals with a strong Q2 earnings beat. The post-earnings call will be closely watched for any commentary about what is expected in the quarters ahead.
For the quarter that ended August, Wall Street expect the Grapevine, TX-based company to lose 67 cents per share on revenue of $1.12 billion. This compares to the year-ago quarter when it lost $1.40 per share on revenue of $942 million. For the full year, ending in January, the loss is expected to be 56 cents per share, narrower than the year-ago loss of $2.14 per share, while full-year revenue of $5.57 billion would rise 9.5% year over year.https://fbe2372b713009b27562e81337e18523.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
The WallStreetBets community has been largely credited for GameStop’s stock performance. The company has delivered declining revenue over the last four years, while posting losses for the past two years which has surpassed $1.2 billion, and losses are expected for the next several years. That’s where the arrival of Ryan Cohen has been key; since his arrival, the company has cleaned up its balance sheet.
By taking advantage of the stock’s strong prices returns, the company has raised roughly $1.5 billion in cash, which it has used to redeem about $216 million of senior notes that were accruing interest at a 10% rate. In addition to closing debt obligations, GameStop now stands in a great capital position with well over $1 billion of cash. This demonstrates that the fundamentals of the business are, in fact, improving. And this is poised to continue as evidenced by recent video game industry sales trends.
Rising by double-digits in consecutive months, video game industry sales have surpassed $50 billion year to date, rising 14% year over year. Meanwhile, hardware sales have doubled year over year for consecutive months. These trends have shown up with GameStop’s results. In Q1, GameStop posted a 25% rise in quarterly revenue of $1.28 billion, beating estimates of $1.05 billion. May total revenue grew 27% year over year, suggesting gamers are starting to spend in GameStop’s stores again.
On Wednesday the company will need to show that it can sustain these growth rates, while showing e-commerce improvements which will affirm GameStop stock can trade on its own fundamentals, not just on social media frenzy.
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