Meme Stock Rockets 35% On First Profit Since 2021

GameStop (GME) blew away expectations for fourth-quarter earnings late Tuesday, reporting its second positive period in the last 12 quarters. Expectations were low but, as one of the first in the retail trading phenomenon that came to be called meme stocks, the retailer’s earnings reports often draw unusual attention. GME stock surged in late trading.

With physical video game sales dwindling, GameStop has reported losses in all but one of the past 11 quarters leading up to results Tuesday. Losses narrowed in the two most recent periods, to 31 cents per share in Q3. The holiday season is historically the video game retailer’s best quarter. But GameStop’s console, accessories and video game sales struggled in 2022.

Hardware and accessory sales averaged a 4.3% decline through the first three quarters of GameStop’s 2022 fiscal year. Software and video game sales roughly averaged a 6% drop during that time as players increasingly switch to digital downloads.

And there wasn’t a major game console release this year to help juice results, as PlayStation, Xbox and Nintendo systems have done in the past.

“Long-term headwinds include potential liquidity challenges and changing gamer preferences, with greater appetites for cloud, digital mobile and subscription,” Wedbush analyst Michael Pachter wrote in a Thursday research note, Barron’s reported.

Pachter noted Sony’s PlayStation 5 had strong holiday-quarter sales but, “a significant percentage of those units were sold directly to consumers.” He pointed out that GameStop’s non-fungible token marketplace launch has been underwhelming. But GameStop’s physical collectible sales, such as Funko (FNKO) Pops!, may have fared well for the quarter.

Pachter reiterated the underperform rating with a $5.30 price target for GME stock, which he first announced in December following Q3 earnings. Shares on Tuesday traded above $17, down about 86% from their January 2021 high.

“The shares remain at trading levels that are disconnected from the fundamentals of the business due to irrational support from some retail investors,” he wrote.

GameStop Earnings

GameStop smashed forecasts for Q4 results. Adjusted earnings leapt to 16 cents per share, vs. a 47-cent loss last year. Net sales dipped 1.2% to $2.226 billion. Analysts expected GameStop to report a loss of 13 cents per share on a 3.2% drop in revenue to $2.18 billion.

Hardware and accessories sales increased 4.5% to $1.24 billion. However software sales, which includes new and pre-owned video game software, fell 9.5% to $1.82 billion.