GameStop (GME) Reports A Profit, While Stocks Start Devaluation

Short Term Achievement

GameStop (GME) has made its mark by finally achieving a long-pursued financial goal, for the first time since Q1 of 2021. After Matt Furlong's announcement as CEO in August of last year, GameStop underwent a comprehensive overhaul to solidify its infrastructure and technology. They are now focused on building toward sustained profitability by introducing exclusive products while tapping into unexplored potentials unleashed by its brand recognition. Moreover, the company has made significant investments to upgrade store operations.

Despite having to undertake difficult measures, such as staff reductions and ceased investments in its restructuring strategy focused on technology advancement, GameStop has successfully managed to lower its expenses by 15%. This resulted in a decrease from $538 million SG&A during the same period of last year down to $453 million.

Moreover, GameStop reported a 26% drop year-over-year from 915$ million down to 638$ million for the quarter. This, combined with a strong cash position totaling an impressive $1.4 billion in comparison to last quarter's sum of just over one billion dollars, reinforces its financial stability going forward.

Investors should pay close attention to GameStop's SEC filing, as it may contain useful insights that could benefit GME stock performance. Notably, the form has yet to be reported at this time.

Market Reactions

The remarkable “meme” craze around GameStop has seen its stock increase, with little relation to the company’s actual performance. For extended amounts of time during the last three years, oddities in market activity meant that investing in GameStop was completely independent of broader indices and could be seen as influenced by external factors.

Since the start of 2021, GameStop's stock has seen little-to-no movement resulting from earnings performance. These trends can be attributed to retail investor activity rather than fundamental analysis alone.

Despite market expectations, this past quarter proved incredibly successful, with shares up to 50% in after-hours trading upon the announcement of remarkable profit results.

During the preview of GameStop's fourth-quarter earnings, I highlighted that reduced SG&A expenses coupled with sustained positive cash flow could be met favorably by the market; This would help propel them toward management's objective for short-term profitability.

GameStop recently exceeded expectations with their quarterly results - confounding the bearish views of Wall Street, as outlined by Wedbush analyst Michael Pachter's pre-earnings commentary. He had warned that long-term challenges like liquidity issues and shifting gamer preferences could negatively impact the company. However, these concerns have been unfounded.

The social media crowd seemed to be in a buoyant mood as they highlighted GameStop's powerful profits this quarter that brought optimism to investors with that video game retailer.

Short Sellers At Risk

GameStop's stocks have been the subject of great debate with respective sides, from short sellers and individual investors. Despite strong opinions on either side, investors' recent jubilation regarding news surrounding the company has left bearish traders in an awkward predicament. With rising popularity driven by a vocal crowd of retail buyers, this underdog corporation could be set to challenge Wall Street perspectives for years ahead.

However, shorting GameStop can be risky, as the cost to borrow shares for these transactions has been unstable and unreasonable. This situation was particularly concerning when short sellers faced higher-than-average fees earlier this year.

Moreover, Over the last month, nearly $1 billion in short interest was seen for GameStop. Data from S3 Partners reveals an impressive 1.1 million shares were bought to cover shorts during that period. But, on earnings day alone, this figure increased by a further $44 million.

Shares of GameStop jumped by an impressive 50% after hours, prompting a wave of significant losses for short sellers totaling over $313 million. S3 Partners has anticipated that investors should be prepared to witness more massive covering shortly.