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Why Shares of GameStop Corp. Plunged 17.6% in March

By Travis Hoium – Apr 6, 2018 at 1:25PM

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The video game retailer doesn't look like it has a very bright future.

What happened 

Shares of video game retailer GameStop Corp. (GME 4.52%) plunged 17.6% in March, according to data provided by S&P Global Market Intelligence, after fiscal fourth-quarter net income came in lower than expected and guidance failed to excite investors. No turnaround in the video game business appears to be on the horizon. 

So what 

On the surface, fourth-quarter results didn't seem all that bad. Revenue was up 15% to $3.5 billion, partially due to an extra week in the quarter, and adjusted earnings of $2.02 per share beat analyst estimates of $1.97. But the GAAP loss of $105.9 million, or $1.04 per share, included a $406.5 million impairment due to writedowns in the technology brands segment. As fellow Fool Timothy Green wrote, the writedown was an admission that the company's strategy was flawed in that segment

Man playing video games at home.

Image source: Getty Images.

Guidance also failed to excite investors. Revenue is expected to be down 2% to 6% with same-store sales flat to down 5%. Adjusted earnings per share are expected to be $3.00 to $3.35, while analysts' consensus estimate was $3.32. Everyone knows GameStop is in decline, but management says it may be declining faster than investors were expecting. 

Now what 

It's tough to know what to do with a company like GameStop today. It's still profitable on an adjusted basis and the $1.52 annual dividend is a 12% yield for investors. But it's hard to argue that the company has a bright future as video games move to digital channels on mobile, consoles, and computers. It's the overall decline in the business that will keep me out of the stock, despite a seemingly attractive forward price-to-earnings ratio of around 4 and a high dividend yield.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short April 2018 $18 calls on GameStop. The Motley Fool has a disclosure policy.

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