There was some good news and bad news for GameStop (GME 6.16%) investors last week. The good news is that the video game retailer saw its stock surge 10.4% the day after it posted mixed fiscal first-quarter results. It's the first time in the last four years that GameStop stock has a huge move up after delivering fresh financials.
The bad news is that the stock moved even lower through the rest of the week. The shares fell in each of the other three trading days, closing out the abridged trading week with a 2.6% decline. The overall market clocked in with a more modest 1.2% dip. Math suggests that GameStop lost last week, but it may have finally licked its earnings season curse.
Image source: Getty Images.
It's a new cheat code
Earnings season has been challenging for GameStop, but it's starting to crack that code. A year ago the stock had moved lower the day after reporting financial results in 10 of the previous 11 quarters. It has now flipped the script, moving higher the trading day following earnings in all but one of the last four reports. The previous up days were modest, but Thursday's pop was clearly a blowout performance.
Is the losing streak over? Here's what those post-report trading days have looked like since the fall of 2018:
- Nov. 29, 2018: down 6.7%
- 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%
- March 16, 2022: up 3.5%
- June 1, 2022: up 10.4%
We're still looking at an average decline of more than 11% over the past 15 reports, but momentum is certainly improving. The tide is definitely turning, with GameStop squeezing out gains in back-to-back quarters and three of the last four reports.
Things aren't tidy and perfect. GameStop shares actually opened the trading day lower in all of three of the winning post-earnings trading days over the past year. The market hasn't been initially impressed by the quarterly numbers, and it doesn't take long to see why. The chain has posted a larger than expected loss in all four of those quarters.
Revenue growth has been refreshingly positive, but GameStop is paying a lot for that top-line growth. Margin erosion, accelerating operating losses, and heavy cash burn have helped generate sales that are higher than the year before but still well off pre-pandemic levels.
It may be clear what GameStop is doing. It's buying growth, and nudging the market to overlook anything beyond the top line of its income statement. It's not all that different than what many early stage growth companies do, but in this particular case it's a mature retailer trying to carve out a second act after years of pain with its flagship business model.
GameStop can obviously make this work. It has galvanized retail investors as a meme stock, and its brand is far more relevant as a household name than it was just a couple of years ago. It's dangerous to bet against GameStop with 20% of its outstanding shares currently sold short. It's a lot less than early last year when more than 100% of its float was being reported as shorted, but it's still a high number. Squeezes are still possible, and now that GameStop isn't necessarily a stock to avoid during earnings season it may be harder to make arguments for near-term bearish wagers the next time it reports fresh financials in early September.
"Another positive day of trading on Thursday following Wednesday afternoon's earnings report, and one can argue that GameStop has cracked the code to its earnings seasons curse," I wrote earlier in the week. GameStop has checked off that box. The next step is to see if it can deliver that sales growth on improving margins and burning less cash. Like any good platform video game, the next level for GameStop is always going to be harder than the one that it just completed.
