GameStop price target cut as analyst cites retailer's lack of strategy

By James Rogers

Videogame retailer and original meme stock GameStop reported second-quarter results late Tuesday

GameStop Corp. surprised investors with a quarterly profit in its second-quarter results Tuesday, but the videogame retailer still has many challenges ahead, according to analyst firm Wedbush.

"While we admire GameStop's ability to manage operating losses, we think it would be just as reasonable for management to close all of its stores and operate as a bank," Wedbush analyst Michael Pachter wrote in a note released Wednesday. "GameStop has roughly $10 per share in cash now, but without a hint of any strategy that would reasonably deploy capital, we do not see why shares trade at 2x cash."

"[GameStop] shares trade at a level that ignores the company's many challenges ahead," Pachter wrote. Wedbush reiterated its underperform rating for GameStop (GME) and lowered its price target to $10 from $11.

Related: GameStop's stock sinks after sales fall, 20 million share stock offering

GameStop has not yet responded to a request for comment.

While original meme stock GameStop reported a second-quarter profit, its sales dropped more than 30% to below analyst expectations. The company also disclosed an at-the-market stock offering of up to 20 million shares, which represents 4.7% of the total shares outstanding.

GameStop's shares are down 16% Wednesday, putting the stock on pace for its largest daily percent decrease since June 12, 2024, when it fell 16.5%, Dow Jones Market Data show.

Related: GameStop faces 'near insurmountable barrier' in its return to growth, says Wedbush

During the second quarter, GameStop's selling, general and administrative expenses decreased $51.7 million, or 16%, compared with the prior year. Store-related costs decreased $8.4 million compared with the prior year in connection with prior-year store closures, primarily in GameStop's European segment, the company said in a filing with the Securities and Exchange Commission late Tuesday.

In the filing, GameStop said it will continue to focus on cost containment, including closing underperforming stores, as it looks to operate with increased efficiency. The company has initiated a comprehensive review of store portfolio optimization, it said, which involves identifying stores for closure based on factors including an evaluation of current market conditions and individual store performance. "While this review is ongoing and a specific set of stores has not been identified for closure, we anticipate that it may result in the closure of a larger number of stores than we have closed in the past few years," the company said.

"GameStop announced accelerated store closures with its earnings, but with no replacement strategy in sight, management indirectly indicates that it is no longer beholden to shareholder interests," Wedbush's Pachter wrote in Wednesday's note. "GameStop produced a modest sequential improvement to its profit, driven by increased interest income following two share offerings (for a total of 120 million shares) that netted the company roughly $3 billion in cash, or around $7 per share."

Related: GameStop, AMC stocks rise as 'Roaring Kitty' makes first social-media post in 2 months

GameStop ended the quarter with cash, cash equivalents and marketable securities of $4.204 billion, up from $1.195 billion at the end of the same period last year. In June, GameStop said it raised $2.14 billion in a stock sale, noting that it may use the proceeds for mergers and acquisitions.

Pachter reiterated his recent assessment that GameStop "faces a near insurmountable barrier to its planned return to growth." This includes the ongoing shift of game sales from physical to digital, a decline in game sales as microtransactions proliferate, the growth of subscription services and an ongoing decline in hardware sales as streaming services proliferate, the analyst added. Pachter also cited "the company's total lack of any strategy to enter new categories with growth potential."

Microtransactions are in-game purchases made by gamers.

Related: Why Roaring Kitty is a GameStop 'true believer'

"We have yet to see any strategy," wrote Pachter. "Without any indication that the company plans a turnaround, we remain reluctant to assume that it can and will."

He added: "Instead, it appears to be moving further away from any shareholder accountability. As such, we cannot recommend shares of [GameStop]."

Former Chewy Inc. (CHWY) CEO Ryan Cohen was named GameStop CEO in September 2023, marking the latest chapter in his attempt to breathe new life into the company. In December, GameStop's board of directors approved a new investment policy, permitting the company to invest in equity securities, among other investments. The board gave Cohen the authority to manage the investment portfolio.

-James Rogers

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09-11-24 1058ET

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