GameStop Sees A Tough End To 2017

Wedbush’s Michael Pachter expects GameStop Corp. GME shares to continue to trade at a compressed earnings multiple until the company is able to successfully reverse the decline in its core video game business.

Pachter maintains an Outperform rating on the company, with a price target of $30.

“Once stability has returned and it has begun to deliver on the earnings growth promised by its new initiatives, shares could appreciate above the current roughly 6x P/E multiple, potentially to 7–8x,” the analyst mentioned.

Q3 Performance

GameStop reported its Q3:16 results in line with its negative pre-announcement, with revenue of $1.96 billion.

The miss relative to the initial guidance was largely driven by weaker-than-expected sales across some of the key software titles and related hardware bundles.

Pachter noted tech brands’ revenue underperformed the estimate due to the recall of the Samsung Galaxy Note 7, as well as weak supply of the iPhone 7.

The non-GAAP EPS came in at $0.49, as compared to the pre-announced $0.45–$0.49.

Tough Year-End

“GameStop expects a challenging year-end for the traditional (physical) video game industry. It expects new hardware sales and new software sales to each decline by 15–20 percent,” the analyst stated.

The company expects November industry sales to decline more than 20 percent, with a double digit decline in December and January being nearly flat.

In addition, Activision Blizzard, Inc. ATVI's "Call of Duty: Infinite Warfare," which was released on November 4, has also underperformed GameStop’s expectations, although Pachter believes “the mix of digital bundles may have impacted GameStop’s sales.”