GameStop (NYSE:GME) continues to be one of this year's biggest gainers. The video game retailer is a nine-bagger in 2021, but it's a different story for investors that bought into the meme stock after its initial pop in late January. The shares are down 63% since the all-time high that was hit on Jan. 28 through Tuesday's close. 

Even if you dismiss that spike as a frenzied short squeeze that took the market by surprise, GameStop is still trading 49%, 48%, and 30% below levels it hit in April, June, and November, respectively. Can GameStop rally to new highs when a lot of the variables that sent it skyrocketing earlier this year are no longer in play? With fresh financials just hours away -- GameStop reports shortly after Wednesday's close -- the chain has a chance to impress.

The rub is that history hasn't been on its side over the past three years when it comes to price action after its quarterly updates. GameStop stock has averaged a decline of 11.8% the day after posting financial results over the past dozen quarters. Zoom out and you see a spectacular three-year chart, but earnings season has been rough for GameStop investors. If things play out differently this week the specialty retailer is going to have to try something new.

A group of friends playing video games.

Image source: Getty Images.

Playing to win 

A lot has changed at GameStop since January. It was the perfect storm back then. Short interest was technically over 100%, as a lot of people were betting against the chain's survival in the new normal of digital delivery. GameStop was beefing up its e-commerce initiatives, but its business model was particularly susceptible to direct distribution. Its highest-margin business involved the resale of secondhand games and gear. Customers would trade in physical discs and cartridges of games they already beat or older consoles and related equipment that they no longer needed for a pittance. GameStop would clean the trade-ins up and sell them at hefty margins. With console makers and software publishers shifting to digital downloads there would no longer be old games to trade in. What role would GameStop play?

The bearish narrative found GameStop shrinking its footprint of stores, seemingly making it a matter of when -- not if -- the chain would falter. All it took was a lively Reddit forum full of retail investors with battering rams and torches to light a fire that would send the bears scrambling and licking their wounds. New leadership with a track record of success in e-commerce only helped fuel the turnaround potential.

The climate is different now. Short interest is just below 9% of the shares outstanding, not exactly fertile soil for another short squeeze. The stock's market cap is also substantially greater than it was in mid-January before the mother of all short squeezes catapulted the stock higher. 

There's still hope for a different ending than we've seen in 10 of the past 12 quarters with the stock moving sharply lower the next trading day after offering up its quarterly results. Expectations are low. Analysts see revenue growing 19% to $1.19 billion, but this is 17% less than it rang up during the same quarter two years ago. Any material improvement that gets the chain ringing up sales at a pre-pandemic level could get bulls excited.

This is also a seasonal business, so a loss is widely expected. Wall Street believes that this fiscal year will be the fourth in a row with GameStop in the red. Can fresh leadership get the balance right between launching new growth initiatives while also keeping costs in check? GameStop might also offer up a bullish outlook for the seasonally potent current fiscal quarter, making it even more relevant in the eyes of investors in video game stocks. History suggests that GameStop can be a dangerous name to hold when it reports financial results, but the past year has already seen the chain working with a new playbook.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.