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Why GameStop Shares Tanked Thursday

By Howard Smith – Dec 9, 2021 at 8:27AM

Key Points

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The niche retailer reported a nice revenue increase in its fiscal third quarter, but its bottom-line losses mounted.

What happened

Original meme stock GameStop (GME 2.31%) has maintained a lofty valuation multiple all year, but some investors may be getting impatient with the company's progress. After reporting its fiscal third-quarter financial results Wednesday night, GameStop shares dropped as much as 7.4% in early trading Thursday. As of 12:28 p.m. ET, shares remained down by more than 6%. 

So what

GameStop shareholders have been patiently waiting for the company to transition to a business model more focused on e-commerce -- management's stated goal. The stock soared in early 2021 as retail investors piled into it in a bid to use the high level of short interest in the company to set up a short squeeze that would deliver huge returns. That seemed to work -- the stock rocketed upward by more than 1,500% at its peak. While shares are still up more than 760% year-to-date, the company's Q3 financial report didn't impress investors as losses widened significantly year over year

red arrow showing stocks dropping, set over $100 bills.

Image source: Getty Images.

Now what

GameStop's revenue jumped by 29% year over year to nearly $1.3 billion in its fiscal third quarter, which ended Oct. 30. But its net loss widened to $105.4 million from $18.8 million in the year-ago period. The company said it had to increase spending in order to stock up its inventory "to meet increased customer demand and mitigate supply chain issues."

GameStop also spent money to set up new offices in Seattle and Boston, which it called "technology hubs." New CEO Matt Furlong and CFO Mike Recupero were both brought on in June, and came to the company with extensive technology and e-commerce experience from Amazon

But thus far, there's not much sign of the e-commerce pivot materializing, and investors may not continue to wait if losses keep mounting. GameStop does have about $1.4 billion in net cash on its balance sheet. But unless it reports a growing, and profitable, business, the sharp spike in valuation that has lasted virtually all year may not sustain itself much longer.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Howard Smith owns Amazon. The Motley Fool owns and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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