GameStop Stock Down 27% in March – Time to Buy GME Stock?

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The price of GameStop stock is down 27% so far this month although shares were trading 9% higher in pre-market stock trading action today only three days ahead of the release of the company’s financial results covering the fourth quarter of the 2021 fiscal year.

The performance of the meme stock so far this year has been quite disappointing as GME has shed 40% of its value thus far as the market has adopted a risk-off attitude amid expected changes in the macroeconomic environment and the latest armed conflict between Russia and Ukraine.

According to analysts’ estimates compiled by Seeking Alpha, revenues for the three months ended on 30 January 2022 are expected to land in a range between $2.11 and $2.38 billion with the mid-point of these estimates pointing to a 4.4% year-on-year jump in the firm’s top-line results.

Meanwhile, Wall Street’s consensus estimate for GameStop’s adjusted earnings per share is standing at $0.84 with the lowest forecast sitting at 28 cents and the highest at $1.25 per share.

Based on the price of options expiring this week, market participants are pricing a 17% post-earnings fluctuation in the price of GameStop stock.

What could be expected from GME stock this week following the release of its quarterly earnings report? In this article, we will be assessing the price action and fundamentals of this gaming stock to outline plausible scenarios for the future.

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GameStop Stock – Technical Analysis

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GameStop (GME) price chart – 1-day candles with multiple indicators – Source: TradingView

The price of GameStop is declining to the $90 level this morning and this has been a strong area of support for the stock on multiple occasions in the past. The macroeconomic landscape at a global scale has been deteriorating and that significantly affects the riskiest asset classes as market participants tend to reduce their exposure to these investments in these scenarios.

Some of the negative catalysts that could be weighing on the valuation of GME include the conflict between Russia and Ukraine, an expected interest rate hike from the Federal Reserve, and elevated inflationary pressures.

The yield of 10-year Treasury Notes is climbing to 2.1% this morning and that is typically another reason to expect further weakness in the price of GME stock as higher Treasury yields tend to depress the valuation of equities.

Momentum indicators for GME are pointing to a bearish outlook as the Relative Strength Index (RSI) at 34 after failing to climb above the 50 level in the past few weeks while the MACD has drifted to negative territory and below the signal line.

Moving forward, a break below the $85 level could lead to a severe drop in the price of GameStop (GME) stock with the next area of support being found at around $40 per share resulting in a total downside risk of 55.5%.

Meanwhile, if the price bounces off the $90 threshold, there are still multiple areas of resistance that bulls would have to break to overturn the downtrend including the $120 and $135 thresholds.

GameStop Stock – Fundamental Analysis

GameStop sales are expected to finish the year at $5.97 billion resulting in a 7.7% drop compared to the firm’s pre-pandemic top-line results (2019).

Even though the company managed to sanitize its balance sheet by taking advantage of the meme stock craze last year, the fact that revenues have kept declining is a warning signal and the current valuation remains heavily stretched based on the firm’s earnings and cash flow generation capacity.

In the first nine months of 2021, GameStop lost $233.8 million and burned $306 million in cash. Even though losses were lower in relative terms as a percentage of the firm’s sales, the cash burn accelerated compared to the previous year as inventories increased significantly.

By the end of the third quarter of the 2021 fiscal year, the company reported total cash and equivalents of $1.41 billion and nearly no long-term debt.

At the moment this is written, GameStop is trading at 1.2 times its forecasted sales for 2022 and that makes the company an interesting candidate for an acquisition considering its low leverage levels.

In the scenario that the firm is taken over by another company that might benefit from its brand and network of physical stores, investors may benefit from a higher offering price. However, the odds of that happening is uncertain.

All things considered, from a fundamental perspective, the valuation remains unattractive as the company’s business model continues to be considered outdated.

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About Alejandro Arrieche PRO INVESTOR

Alejandro is a freelance financial analyst with 7 years of experience in the industry. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing, macro analysis, and technical analysis. Other publications Alejandro has written for include The Modest Wallet, and Capital.com.