GameStop (GME) is one of the most followed stocks by visitors to Zacks.com lately, so it might be a good idea to check out some of the factors that could affect the stock’s near-term performance.
Over the past month, shares of this video game retailer have returned 2.9% versus a change of 6.2% for the Zacks S&P 500 Composite. During this period, the Zacks Gaming industry, which GameStop belongs to, has gained 8.9%. The key question now is: what could the future trajectory of the stock look like?
While press releases or rumors about a significant change in a company’s business outlook usually cause the stock to “trend” and result in an immediate price change, there are always some fundamental facts that ultimately determine the buy or hold decision.
Revisions to earnings estimates
Here at Zacks, we evaluate the change in a company’s future earnings forecast above all else. That’s because we believe the present value of its future earnings stream determines the fair value of its stock.
Our analysis is basically based on how sell-side analysts who cover the stock adjust their earnings estimates to take into account the latest business trends. When earnings estimates for a company increase, the fair value of its stock also increases. And when the fair value of a stock is higher than its current market price, investors tend to buy the stock, leading to an increase in its price. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
For the current quarter, GameStop is expected to report a loss of $0.01 per share, which represents a change of +66.7% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the past 30 days.
The consensus estimate for current fiscal year earnings of $0.08 represents a change of +33.3% from last year. This estimate remained unchanged over the past 30 days.
For the next fiscal year, the consensus estimate of $0.02 represents a difference of -75% from GameStop’s earnings estimates a year ago. Last month, the estimate remained unchanged.
With an impressive outside-audited track record, our proprietary stock rating tool – the Zacks Rank – is a more conclusive indicator of a stock’s near-term price movement because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, have led to a Zacks Rank #3 (Hold) for GameStop.
The following chart shows the development of the company’s consensus estimate for earnings per share over the next 12 months:
12 months EPS
Forecasted sales growth
While earnings growth is arguably the best indicator of a company’s financial health, nothing will happen if a company can’t grow its revenue. After all, it’s nearly impossible for a company to grow its earnings over a sustained period of time without increasing its revenue, so it’s important to know a company’s potential revenue growth.
For GameStop, the consensus revenue estimate for the current quarter of $900 million implies a change of -22.7% from last year. For the current and next fiscal years, estimates of $4.13 billion and $3.7 billion suggest changes of -21.6% and -10.5%, respectively.
Latest reported results and surprise history
GameStop reported revenue of $881.8 million in the last quarter, a change of -28.7% year over year. Earnings per share for the same period were -$0.12, compared to -$0.14 a year ago.
Compared to the Zacks Consensus Estimate of $900 million, the reported revenue represents a surprise of -2.02%. The EPS surprise was -20%.
Over the past four quarters, GameStop has beaten consensus earnings per share estimates twice. The company has beaten consensus revenue estimates only once during that period.
Evaluation
No investment decision can be efficient without considering the valuation of a stock. To predict the future price movement of a stock, it is crucial to determine whether its current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects.
By comparing a company’s current valuation multiples, such as the price-to-earnings ratio (P/E), the price-to-sales ratio (P/S) and the price-to-cash-flow ratio (P/CF), with its historical values, you can determine whether the stock is fairly valued, overvalued or undervalued. Comparing the company to competitors using these parameters, on the other hand, gives a good idea of how reasonable the share price is.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays special attention to both traditional and unconventional value measures to rate stocks from A to F (an A is better than a B; a B is better than a C, etc.), is quite useful in determining whether a stock is overvalued, correctly priced, or temporarily undervalued.
GameStop gets a grade of C on this score, meaning it trades on par with its peers. Click here to see the values of some of the valuation metrics that led to this rating.
Conclusion
The facts discussed here and much more information on Zacks.com could help you decide whether the market hype surrounding GameStop is worth paying attention to. However, the Zacks Rank #3 suggests that the stock could perform in line with the broader market in the near future.
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GameStop Corp. (GME): Free Stock Analysis Report
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