Why GameStop Shares Are Taking a Beating and What Analysts Are Saying About It

GameStop Corp. analysts fear there's "another very tough year" ahead for the retailer after a grim forecast that reflects a weak slate of new video games and "continued deterioration" in its pre-owned segment. The Grapevine-based company warned that sales will drop 5 percent to 10 percent this year. It's facing new competition from Apple and Google planning to launch online gaming services and while it's stepped up expansion into esports, the retailer faces new competitors in that space.After the market closed on Tuesday, GameStop reported a fourth-quarter profit of $1.45 a share, which fell short of analysts' estimates. Sales of $3.1 billion in the holiday quarter, also were below analyst estimates.The stock has recovered from a 14 percent drop in early trading in New York, but opened below $9 a share for the first time since 2004.GameStop needs Sony and Microsoft to launch new consoles, says Motley Fool, but that's not happening this year. Bets are 2021 at the latest. In the meantime, the company has a lot of cash and low debt, always a good recipe for getting to the next level, but not a guarantee. Telsey analysts called the forecast "sobering," while Bank of America cautioned about further downside risk to earnings as players increasingly shift to streaming and subscription models. It's just the latest blow for investors after the company failed to sell itself earlier this year, sparking calls for change from activists. Here's what Wall Street is saying:Bank of America, Curtis NagleGameStop's projection that sales will drop 5 percent to 10 percent this year reflects weakness in all gaming segments and signals that earnings have not yet bottomed.Share buybacks beyond the currently authorized $300 million are "unlikely and would be imprudent." Bank of America expects "another very tough year" for the company.Nagle rates the stock at underperform and slashed his price target to a fresh Street-low of $5, from $9.Telsey, Joseph Feldman"GameStop reported a messy 4Q18 result due to the sale of the Spring Mobile business" with pressure on its high-margin pre-owned game business being evident with a 21 percent drop in sales."We continue to believe the growth of accessories, collectibles, and digital streams are not likely to be enough to overcome the persistent structural pressure on the physical video game industry.""While this outlook is sobering, the company anticipates" continued double-digit growth in collectibles and "seems excited about its new strategic partnership in the esports space as it looks to connect with more customers."Rates shares market perform, lowered price target to $10 from $11.Baird, Colin Sebastian"Pre-owned softness and margin uncertainty warrant caution" after fourth-quarter results came in below expectations driven by weak pre-owned revenue and margins that were consistent with its holiday sales report.Pre-owned business remains the biggest concern after decline in sales was "exacerbated by under-performing new physical software and increasing digital penetration."Initial 2019 outlook reflects "continued core video game headwinds" as management withheld full-year EPS forecast given the pending CEO transition and cost savings initiatives.Maintains neutral rating, cuts price target to $11 from $12.Wedbush, Michael Pachter"We expect shares to trade at a compressed EPS multiple until the company can slow the rate of decline in its core video game business."Maintains outperform rating, trims price target to $12 from $15.What Bloomberg Intelligence says"Fiscal 2019 looks to be a tough year for GameStop, amid an expected lighter release slate and continued slowdown in console sales. New hardware releases in 2020 may help stem sales declines." -- Matthew Kanterman, technology analystBloomberg, Bailey Lipschultz and Staff Writer Maria Halkias contributed to this report. Twitter:@MariaHalkias  Continue reading...

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