GameStop’s first profitable quarter since January 2021 sent the stock skyrocketing.
GameStop (ticker: GME) stock rose 35% to $23.87 on Wednesday. Shares were trading at $27 earlier in the session. The gain was GameStop’s largest percentage gain since March 25, 2021, when it rose 53%, according to Dow Jones Market Data.
As of Tuesday night, the company reported earnings of 16 cents per share, well above the 16 cents per share loss that Wall Street analysts had been expecting. The report initially sent shares of AMC Entertainment Holdings (AMC) and Bed Bath & Beyond (BBBY) higher, but both closed for the day as the broader market plummeted.
Ihor Dusaniwsky, managing director of predictive analytics at short data firm S3 Partners, told Barron’s that around 56.1 million GameStop shares were recently shorted. A short seller borrows shares and then sells them immediately with the goal of buying the same number of shares at a lower price in the future. If the stock falls, the difference is its earnings minus borrowing fees.
“I expect a wave of short coverings tomorrow if this price level holds and the short squeeze starts,” Dusaniwsky said as shares surged after Tuesday’s close.
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GameStop critics argue that the company’s business of selling used video game discs is down, but the stock has the backing of enthusiastic retail investors hoping to rekindle the January 2021 surge in meme stock. Though GameStop’s software sales fell 15% year over year to $670.4 million, the company’s efforts to contain costs and stronger sales of hardware and collectibles surprised Wall Street.
Jefferies analyst Andrew Uerkwitz maintained a hold rating on the stock with a price target of $20 in a research note issued after the report on Tuesday. He said GameStop has shown progress in cutting costs, although he noted that overall revenue was down 1% year over year. He pointed to the increasing availability of newer video game consoles like the PlayStation 5 as a factor that benefited the retailer.
If GameStop can string together more profitable quarters, it can work longer hours without raising cash by selling new stock. Of course, even before its meme stock status, the January quarter — which includes the holiday season — was always when the company generated the bulk of its annual earnings.
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Though GameStop has garnered similar enthusiasm for retail investors as AMC and Bed Bath & Beyond, its profitability could help set it apart. The company did not give an outlook for the current quarter. Wall Street will likely want to see sustained gains before changing its stance on the retailer.
Uerkwitz forecasts earnings before interest, taxes, depreciation and amortization losses of $62 million for the fiscal year ended January 2024. That’s an improvement from its previous estimate of $79 million.
“Early signs of costs are encouraging, and [we] expect profitability again in [the January 2024 quarter]but I want to see leverage in the non-holiday quarters before modeling a positive Ebitda for the full year,” he wrote.
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Wedbush analyst Michael Pachter, who kept an underperform rating and a $5.30 price target on GameStop stock last week, is still not bullish.
“They’re saving a lot, which is an encouraging sign, but they’re unlikely to save their way to wealth,” he told Barron’s. “I think the results are unique and anticipate a return to the losses.”
For now, though, it was the meme stock crowd doing a lap of honor.
Write to Connor Smith at [email protected] and Adam Clark at [email protected]