GameStop Q1 earnings preview: Where next for GameStop shares?

8 Jun 2021

City Index

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GameStop Q1 earnings preview Where next for GameStop shares

GameStop will release quarterly results later this week but, with its AGM to be held on the same day, investor’s attention will be elsewhere. We explain what to expect and where the GameStop share price could be headed.

When will GameStop release its Q1 results?

GameStop will release first-quarter results after the markets close on Wednesday June 9. This will cover the three months to the end of April, 2021.

Importantly, GameStop will also be holding its annual general meeting in the morning, before releasing the update. It will then hold a separate earnings call at 1700 ET to discuss the results.

GameStop earnings consensus: what to expect

GameStop shares have risen by over 1500% since the start of the year and remained highly volatile. It has become a firm favourite of Reddit-inspired retail traders that have piled into GameStop and other so-called ‘meme stocks’ like AMC and Blackberry in an effort to squeeze short sellers.

That, and that alone, has been the driver behind what is an unbelievable surge in the stock this year. There has not been any fundamental news that could inspire such a rise. GameStop was in trouble long before the pandemic as its bricks-and-mortar model left it languishing in the past. In fact, revenue has declined for three consecutive years and it has been stuck in the red throughout that period.

While earnings are usually the biggest trigger for the share price of most companies, it is clear that GameStop shares have become dislocated with its performance. With this in mind, the financial results are likely to have a minor impact on how the share price performs later this week, but investors will still want to see evidence that a recovery has started.

The good news is that GameStop has returned to growth in the new financial year after being hit hard when the pandemic erupted. Global sales were up 11% in the first nine weeks of the current financial year compared to the year before. Plus, sales growth of 18% in the last five of those weeks implies momentum was gaining traction, setting the stage for a positive set of first-quarter results.

According to a Reuters-compiled consensus, analysts are expecting revenue to rise 13.7% year-on-year to $1.16 billion and, although it is expected to remain in the red, Wall Street expects its net loss to narrow to $50.8 million from the $165.1 million loss booked the year before.

GameStop

Q1 2020/21

Q1 2021/22E

Net Sales

$1.02 billion

$1.16 billion

Net Income

($165.1 million)

($50.8 million)

Diluted EPS

($2.57)

($0.75)

GameStop AGM preview: what to expect

Arguably the more important event of the day is GameStop’s annual general meeting, which will ask investors to re-elect its new board members that joined in January. Ryan Cohen, the founder and former chief executive of online pet food firm Chewy, is due to become chairman of GameStop if re-elected. Although Cohen and his new team are likely to be welcomed by investors, the vote is still critical considering it will be the first time they have been able to voice their support for the new board and, more importantly, the new strategy they want to continue to undertake.

Notably, CEO George Sherman has been with the business since April 2019 and although he is up for re-election, this is just a formality as he has agreed to step aside once a successor has been found. Still, he will leave at the end of July even if the company is still hunting for his replacement, but is likely to be re-elected for continuity purposes.

Cohen is spearheading a new plan to make GameStop fit for the digital age. This includes continuing to shut stores – with GameStop having closed almost 700 of them on a net basis in the last financial year alone – to help boost sales at remaining neighbouring stores and, more importantly, to its online operation that sits at the heart of its new strategy.

The re-election of the board would underpin support for the new plan, which already has momentum to build on. For example, online sales more than trebled last year and now account for around 30% of total sales, up from below 10% historically. Other elements of the strategy include setting up a US customer support centre, expanding its product range, and improving its distribution and fulfilment operations to provide a better online service to customers.

Naked shorts: what are retail traders focused on?

Reading the Reddit threads, it is clear that retail investors believe Wednesday could end up being a catalyst for the share price. However, it is not the results or the AGM that they are primarily concerned with, but a practice called naked short-selling.

When short-selling, an investor borrows a stock and sells it in the hope that it will fall in price, allowing them to buy the stock back at a lower price. When the shares are returned to the lender, the investor books a profit from the difference between the sell and buy price.

Naked short-selling, put simply, is when investors sell shorts linked to shares that they don’t possess. Ultimately, to be able to short a company you should have access to the shares so that if the trade takes place it can be fulfilled. Otherwise, the trade is unlikely to be completed within the required two-day clearing time because the shares associated with the short don’t actually exist. Naked short sellers hope to close out their short-sale before the expiration of the settlement time.

This can lead to a stock being shorted by more than 100%, which implies more shares are being shorted than are actually available. This would allow short sellers to provide greater downward pressure on the share price. A report from Reuters in February suggested GameStop’s short interest peaked at 141.8% of its float in January. As GameStop will be requiring all those that vote at the AGM to provide proof of ownership, investors are hoping this will reveal there are more shares being sold than are actually in issue and act as a catalyst for the share price as well as aide them in the fight against the big guys.

Jefferies told clients earlier this month that its prime brokerage arm would no longer allow short-selling in GameStop and others, according to a memo seen by Bloomberg. Notably, the memo said that it will no longer offer custody on ‘naked options’ in GameStop, AMC Entertainment and Microvision.

The practice of naked short selling was made illegal following the 2008 financial crisis but can still occur today thanks to loopholes in the system. Notably, the Securities & Exchange Commission says naked short-selling is ‘not necessarily a violation of the federal securities laws or the Commission’s rules’.

‘For example, broker-dealers that make a market in a security generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time,’ the SEC explains.

‘Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks as there may be few shares available to purchase or borrow at a given time,’ the SEC adds.

Still, the SEC said it was reviewing the rules for short-selling back in May because of the trading frenzy in GameStop and the crisis at Archegos Capital, stating it was considering introducing new measures to make short-selling and securities lending, which underpins short-selling, more transparent among big institutions.

The nature of the GameStop saga means it is hard to predict how this will play out on Wednesday, but investors and traders should tread carefully considering the volatility in the stock and how dislocated it is from its share price.

Where next for the GameStop share price?

After reaching an all-time high of 483 in January, the price formed a series of lower highs, hitting a low of 132 in May and rebounding.

GameStop trades above its 50- and 100-day ma. It has also pushed above its descending trendline dating back to January. The bullish MACD also keeps the buyers hopeful.

Resistance can be seen at 295 last week’s high. A move beyond this level could open the door towards 350 high March 10 before a move towards the all-time high.

On the flip side a move below 200 the descending trendline could negate the near-term bullish trend and open the door towards 175 the 50 sma.