The Ratings Game

GameStop’s demise could come ‘later this decade,’ Wedbush warns

Videogame retailer reported better-than-expected second-quarter results Wednesday

Videogame retailer and original meme-stock darling GameStop reported better-than-expected second-quarter results on Sept. 6.

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Despite ongoing efforts to control its costs, GameStop Corp. faces a difficult task “saving its way to prosperity,” according to Wedbush analyst Michael Pachter.

The videogame retailer and original meme-stock darling reported better-than-expected second-quarter results Wednesday, boosted by international sales and what the company described as “a significant software release.”

“GameStop delivered a quarter that showed signs of cost discipline, with revenues marginally better than expected and with losses significantly lower than expected,” Pachter wrote in a note released Thursday.

Reflecting GameStop’s cost-control efforts, the company’s selling, general and administrative expenses were $322.5 million, or 27.7% of net sales, compared with $387.5 million, or 34.1% of net sales, in the same period last year. GameStop ended the quarter with cash, cash equivalents and marketable securities of $1.195 billion.

Related: GameStop stock jumps after results top estimates, helped by international gains

However, GameStop still faces plenty of challenges, according to Pachter. “While we laud interim management’s plans to control costs further, it is difficult (if not impossible) for a company to ‘save its way’ to prosperity, particularly in the face of an existential threat such as the one faced by GameStop,” he wrote. “Digital downloads continue to grow, and unlike online sales of pet food (involving a physical product that requires logistical expertise to warehouse and deliver), video games can be downloaded to any of the game consoles that GameStop’s customers use to play their games.”

Other challenges faced by GameStop include far fewer big console-game releases going forward, with a noticeable shift to PC games, according to Pachter. The analyst also highlighted the growth of gaming subscription services and GameStop’s “lack of a clear strategy to enter new categories that have the potential to drive growth.”

Wedbush maintained its underperform rating for GameStop and lowered its price target to $6 from $6.20. Of two analysts surveyed by FactSet, one has a hold rating and one has a sell rating for GameStop.

“GameStop has around $1.2 billion in cash, and can weather $100 million of annual losses for a decade or more,” Pachter wrote. “However, should its revenues decline by $150 million-$200 million per year (which we think is highly likely), it may have trouble trimming costs fast enough to stem the growth of its losses.”

Related: ‘It was like, wow, you could never short a stock again.’ Hedge-fund executive recalls when GameStop’s stock went parabolic.

“Without a clear strategy to replace lost game sales, we think the company will see an acceleration of losses to $100 million annually, then $200 million, $300 million and more, with a likely runway of no more than five years,” the analyst added. “The demise of GameStop is outside the 12-month window we use for our price target, but we expect the company’s demise at some point later this decade.”

MarketWatch has reached out to GameStop with a request for comment.

However, John Oh, an analyst at Third Bridge, highlighted GameStop’s second-quarter software sales, which were $397 million, up from $316.4 million in the prior year’s quarter, and its hardware and accessories sales, which were $597 million, compared with $596.4 million in the same period last year.

“GameStop’s [second-quarter] 2023 results show encouraging signs towards the company’s ongoing transformation plans to regain its presence in the video game retail industry under its new leadership,” he wrote in an emailed statement Wednesday. “The growth in software sales is encouraging to see as hardware sales remained steady.”

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The second-quarter results follow an eventful few months for GameStop that saw the firing of its chief executive and the election of activist investor Ryan Cohen as executive chair in June. This was followed by the resignation of GameStop’s chief financial officer in July.

“It will be interesting to see what the holiday season holds for GameStop and how the company will continue to implement cost-saving measures in their path to profitability,” Oh added.

GameStop’s stock fell 1.4% Thursday, outpacing the S&P 500’s SPX decline of 0.7%.

Bill Peters contributed.