GameStop's stock (GME) is likely dead money until it can convince Wall Street otherwise, the research team at Jefferies argues.
"Long-term growth prospects and lack of communication from management remain a key source of speculation," Jefferies analyst Andrew Uerkwitz wrote in a new client note. "We take a prove it approach, as we are not currently modeling profitability until 4Q23. This message is a clear shift from early 2022 when investors were encouraged by management to focus on long-term growth over near-term margins. To us, this signals that turnaround-related investments have lacked expected demand traction, the growth path carries more risk, and GameStop is recognizing that investor's priorities under current market conditions have shifted."
More than a year into a rather secretive leadership approach by GameStop CEO Matt Furlong and Chairman Ryan Cohen, the entire experiment to reinvent the gaming the retailer appears to be failing.
In the third quarter, net sales plunged 8.5% from the prior year while sales fell in the hardware/accessories and software businesses, which represent about 82% of GameStop's annual sales.
Furthermore, gross profit margins in the quarter were unchanged year over year and the company posted a $95 million adjusted operating loss. Overall, GameStop has lost $354.9 million on an adjusted operating basis in the past year.
Not helping GameStop's turnaround efforts is a complete crash in the once-thriving digital asset market that Cohen and Furlong were banking on, as seen in GameStop's strategic partnership with now-defunct FTX.
Against this turbulent backdrop, GameStop is now in cost-cutting mode as it frantically tries to show better profits to the legions of retail investors continuing to prop up the stock price.
Jefferies Uerkwitz warned that it's buyer beware on GameStop stock, especially as the company looks to shore up its cash position.
"Cash burn continues to be our #1 concern until profitability is proven, and we take our price target to $20 on 0.85x sales + cash per share," Uerkwitz added. "While the multiple sits below peers in digital commerce, gaming, and retail, we shrink our valuation on increased market slowdown, slowing growth assumptions, and lack of clarity into the success of investment initiatives."
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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