Shares of GameStop (GME -0.43%) took a 10.3% hit on Wednesday after posting a much wider quarterly deficit than expected. One analyst argued that the small-box video game retailer failed to deliver enough details about its transformation into a tech company. And an SEC subpoena requesting documents related to an investigation into the stock's trading activity also wasn't a good look.
GameStop taking a hit on the trading day after posting quarterly results shouldn't come as a surprise, even before assessing the catalysts behind the carnage. The stock has now fallen on earnings news in 11 of the past 13 quarters.
We're not talking about small dips, either. The stock's average move is a decline of 13.8% for the day. Wednesday's slide is actually kinder than the average post-earnings sell-off. Sometimes, the trend is not your friend.
You would expect a stock that has taken a hit following all but two quarterly reports over the past three years to be a market laggard, but everyone knows that this isn't the case with GameStop. It continues to be one of this year's biggest gainers and has been a wealth-altering 25-bagger since the start of last year.
Wednesday was just the latest entry in this Wall Street oddity. Just check out how the last three years and change have played out:
- Nov. 29, 2018: Down 6.7% the next day
- April 2, 2019: Down 4.7%
- June 4, 2019: Down 35.6%
- Sept. 10, 2019: Down 9.8%
- Dec. 10, 2019: Down 15.1%
- March 26, 2020: Down 4.3%
- June 9, 2020: Up 2.2%
- Sept. 9, 2020: Down 15.2%
- Dec. 8, 2020: Down 19.4%
- March 23, 2021: Down 33.7%
- June 9, 2021: Down 27.2%
- Sept. 8, 2021: Up 0.2%
- Dec. 8, 2021: Down 10.3%
The reasons for the sell-off make sense. Net sales rose to nearly $1.3 billion -- better than analysts were expecting -- but cost of sales and inventory levels rose even faster. GameStop justifies the uptick in inventory as a way to stay ahead of the supply-chain issues, but historically speaking, it can be problematic. The weaker gross profit is the result of low-margin console sales accounting for the lion's share of GameStop's business. Software sales actually posted a year-over-year decline.
GameStop ultimately saw its operating deficit and net loss widen. Its quarterly loss of $1.39 a share was more than double the red ink that Wall Street pros were forecasting.
Baird's Colin Sebastian was the analyst concerned about the lack of details on GameStop's metamorphosis into a consumer-driven tech company. He also was concerned that leaning on e-commerce to drive growth -- historically a low-margin pursuit -- will weigh on its bottom line.
GameStop needs a blowout performance to break out of its rut of post-earnings disappointments. With short interest dipping below 9% -- its lowest level in more than a decade -- even a strong report was unlikely to trigger the kind of short squeeze we saw earlier this year.
Where does GameStop go from here? It has strong balance sheet, giving it the financial fortitude to finish out what should be its fourth-consecutive year in the red. It will need a game plan for its shift away from a fading physical retailer of physical media to a disruptive player in e-commerce and digital delivery.
It continues to have a strong brand as far as video game stocks go, but investors have to know by now that you can't trust your GameStop investment heading into earnings season. History is still not on its side.