GameStop Q4 earnings preview: Where next for GME stock?

Key takeaways

Demand for video games and consoles continues to decline
Management has promised to become profitable in the ‘near term’
Wall Street has doubts and thinks it will continue losing money for years
GameStop shares at risk of setting new multi-year lows

When will GameStop release Q4 earnings?

Video game retailer and meme stock favourite GameStop will release fourth quarter and full year 2022 earnings after US markets close on Tuesday March 21.

GameStop Q4 earnings consensus

Wall Street forecasts net sales fell 3.5% from the year before in the fourth quarter to $2.18 billion and are looking for a loss per share of $0.15 compared to the $0.47 loss posted the year before.

If achieved, GameStop is on course to report a 2.2% decline in annual revenue to $5.9 billion and see its full year loss per share swell to $1.33 from $1.14.

GameStop Q4 earnings preview

GameStop is expected to report its third consecutive quarter of lower sales. Its popular collectibles continue to grow at an impressive pace with analysts forecasting a 18% jump in sales to $328.8 million. However, that is not enough to counter the dramatic slowdown from its core business selling video games, consoles and other equipment.

Software sales are expected to drop 13% to $686.9 million while hardware sales are forecast to fall 4.5% to $1.13 billion. That will be all the more disappointing considering the fourth quarter covers the busy holiday shopping season over Christmas.

But the one key question ahead of the GameStop earnings is, when will it become profitable?

Management continues to push ahead with their strategy to turn the video game retailer into a new digital behemoth, although progress remains slow. CEO Matt Furlong said in the last quarter that GameStop spent 2021 and 2022 ‘on repairing our decayed foundation, reestablishing a culture of operational intensity, and setting the right long-term priority.’

One positive outcome of the plan has been narrower losses. In fact, GameStop is expected to reveal its smallest quarterly loss per share on record in over a year-and-a-half. GameStop has said it has two main priorities going forward. The first is to achieve profitability ‘in the near term’ and the second is to ‘drive pragmatic growth over the long term’.

GameStop has been reducing costs, which were down 8% in the last quarter, and any further progress here would be embraced by the markets. Jobs have been cut during the second half of the year and efficiency is the buzz word ringing around the stock market at present.

However, there are clearly major doubts over its path to profitability considering Wall Street believes GameStop will continue to lose money over the next three years! That means there are doubts over its ability to succeed, but also an opportunity for GameStop to prove the markets wrong and provide a surprise for investors.

GameStop delivered a rare quarter of positive operating cashflow in the last quarter but don’t expect this to repeat, with analysts expecting it to burn through over $75 million this time around. GameStop had over $1 billion of cash and assets it could sell quickly if needed at the end of September and debt remains manageable. It has said maintaining a ‘sizeable’ cash position is key to maintaining the company’s flexibility.

Where next for GME stock?

The latest leg downward for GameStop shares started in early February and this remains intact. The key level to watch going forward is the two-year low of $16, which was tested late last week. A sustained break below here exposes the risk of the share price dropping back to the next level of support we saw back in February 2021 closer to just $10.

Notably, the few brokers that cover GameStop have an average target price of $12.65 on the stock, implying there is further downside risk to the stock from current levels.

A breakout of the current downtrend would open the door to a move back above $18, but a firmer target should be considered at around $24, marking the February-peak that is aligned with the floor we saw late last year.

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