GameStop Stock Down 5% Today – Time to Buy GME Stock?

GameStop stock is dropping nearly 5% this morning in pre-market stock trading action following the release of its financial results covering the third quarter of 2021 after the video game retailer posted worst-than-expected adjusted net losses.

For the three months ended on 30 October, GameStop reported total sales of $1.30 billion resulting in a 30% jump compared to the $1 billion reported during the same period in 2020. Analysts surveyed by Capital IQ had forecasted total sales of $1.19 billion for the period.

Hardware and accessories sales were responsible for most of this growth as sales jumped from $413.4 million back in Q3 2020 to $669.9 million. Meanwhile, gross profit margins experienced a 290 basis point year-on-year decline upon landing at 24.6% and this resulted in higher GAAP operating losses of $102.9 million compared to the $63 million the company shed a year ago.

As a result, adjusted net losses per share accelerated to $1.39 compared to $0.53 the firm reported in Q3 2020 while the figure more than doubled Wall Street’s consensus estimate of $0.52 for the period.

GameStop (GME) reported a strong $279 million increase in its inventory, which landed at $1.14 billion. The management cited that this was an intentional build-up that sought to meet increased customer demand while mitigating the impact of supply chain issues at the same time.

Investors appear to be reacting negatively to the fact that the company’s losses are expanding beyond the market’s estimates and that is probably the reason why GameStop stock is dropping today.

What can be expected from this meme stock as we are about to start a new year? In this article, I’ll be assessing the price action and fundamentals of GME stock to outline plausible scenarios for the future.

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GameStop Stock – Technical Analysis

Back in September when I last wrote about GameStop, I highlighted that the positive momentum the stock had been experiencing was slowing down and that resulted in a bearish outlook for GME stock.

Shortly afterward, the stock declined from $199 to around $172 per share while the price action has remained fairly stalled since the strong uptick seen on 24 August.

Overall, it seems that the influence of retail traders on the price of GME stock has subsided even though the price remains elevated compared to pre-January figures.

Today’s downtick strengthens a bearish outlook in GME stock as the price remains below its short-term and mid-term moving averages. Moreover, momentum indicators are very depressed with the Relative Strength Index (RSI) currently standing at 40 and possibly heading lower if this pre-market decline spills over to the opening.

Meanwhile, the MACD has already crossed below the signal line and this move is being accompanied by steadily increasing negative histogram readings.

That said, even though the outlook is bearish, there are multiple support areas that could cushion an upcoming drop in GME stock. In this regard, the key support levels to watch currently stand at $150, $130, and $118. If this last threshold is broken, chances are that the stock would revisit its February lows of around $45 per share.

That scenario, however, seems highly unlikely at the moment.

GameStop Stock – Fundamental Analysis

During the first nine months of this year, GameStop sales have experienced a positive advance and its operating losses have been trimmed. However, the firm’s negative free cash flows have accelerated from $73.7 million to $364.7 million this year.

The inventory build-up cited above was the leading cause for this uptick in the company’s cash burn.

In a scenario such as the one retailers are facing right now where supply chain bottlenecks are depressing their top-line performance, the decision to stock up is justified to navigate these troubled waters.

As I mentioned in the previous article, the fact that GME took advantage of this year’s unexpected increase in its share price to pay off most of its long-term debt is quite positive.

However, the business’s inability to produce positive bottom-line results remains a concerning factor.

From a fundamental perspective, the company is trading at a forward P/S ratio of 2.2x. To justify this metric as a standalone company the business would have to improve its profitability significantly compared to current levels. Other than that, for the right buyer, GME might be an attractive target for an acquisition based on its now healthier balance sheet.

However, the odds of such a deal happening are unclear if not inexistent as the company’s business model is considered old-dated and that complicates the picture for shareholders in the mid to long-term.

With this in mind, and discarding any possibility of further short squeezes and other similar events, this might not be a bad time to cash out while there are still gains on the table.

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