GameStop Shares Drop On Weak Sales, And The Chart Shows More Weakness Ahead

Summary:

• GameStop Corp. GME traded 12% lower shortly after Friday's opening bell after fiscal 2018 sales down 2-6 percent.  Shares has recovered somewhat and were trading about 7 percent lower in the late-afternoon session.
• Our view is that GameStop has more time to decline, as its current cycle will continue until January.

GameStop Corporation Stock Weekly Chart

The company reported earnings per share of $0.67 and total revenue of $2.08 billion, compared to analyst estimates of $0.57 and $2.03 billion. However, management’s guidance for the coming year’s earnings came to $2.55-2.75, which is well below the average analyst estimate of $3.04.

While this guidance may be disappointing, explained CEO Shane Kim, “We understand we need to adapt our business model and find additional ways to leverage our customer relationships and competitive advantages.”

While we see GameStop as a classic value trap with a PE ratio of only 4, our own view is rooted in the stock’s market cycles. After a quick pop early in this cycle, the stock has been in the declining phase of this cycle which still has several weeks remaining. Our near term target is $12 by January.

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