Why GameStop Stock Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of GameStop  (NYSE: GME  ) needed a reboot today, falling as much as 11% after a weaker-than-expected outlook in its third-quarter earnings report.

So what: This was actually an excellent quarter for the video game retailer as same-store sales jumped a whopping 20.5% and its EPS of $0.58 beat its guidance and analyst estimates of $0.57. Sales increased 18% to $2.11 billion, also topping the experts' view of $1.98 billion. Still, in the all-important fourth quarter, GameStop's projections came up short. The market has been bullish on the stock as new consoles from Sony and Microsoft are set to hit stores for the holidays, but the company's Q4 EPS forecast of $1.97-$2.14 was short of the analyst consensus of $2.15.

Now what: GameStop shares had more than doubled this year before today's report so the stock's drop needs to be viewed in that context. The popularity of new games such as Grand Theft Auto V helped lift the stock this year as have the high expectations for the PlayStation4 and Xbox One. Considering GameStop's P/E of about 15 based on its full-year EPS projections, those expectations now seem fully priced in. Still, better-than-expected sales of the new consoles could lift the stock again over the holiday season.

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