GameStop $GME stock is down 17% in after markets as the company reported disappointing 3Q 2020 earnings. GameStop has also decided to issue more shares. Should we say goodbye to the short squeeze?
GameStop missed revenues by $90 million (about 8%) and beat non-GAAP EPS (loss) estimates by 60%.
Revenues being down from last year is not really a surprise as the third quarter of 2020 (ending in October) was the last quarter of the 7 year console cycle. Why would anyone buy a PS4 if they know the new PS5 is coming in a couple of weeks? Online sales are up 257% for the quarter but I think GameStop can do better than that. This is exactly what Ryan Cohen talked about in his letter he sent to the board recently. YTD SG&A is down but revenues are down, so it is not really something we should celebrate. What will matter is if they can maintain the same SG&A when revenues actually increase.
GameStop is going to issue $100 million worth of shares. It is not going to be issued immediately but if needed. the CFO said, "We don't need it" in the conference call. Not knowing how this pandemic will end, they are just taking this precaution in case they lack liquidity. I don't want GameStop to issue shares. At current price, it will be a 10% dilution. Even in the worst case scenario, a short squeeze is still very likely.
My thesis on GameStop doesn't change. The new console cycle just started. There's great demand of the PlayStation 5 but Sony $SNE did not make enough of them. In November, comparable store sales are up 16.5%. And profits are expected for the Q4.
Mr Market always reacts to noises. I'm a little disappointed with the management and I agree with Ryan Cohen that we need to move online and close more stores but my thesis on GameStop didn't change because they missed revenues by 8% and beat EPS by 60%. These are just noises. Focus on the fundamentals.
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