2 Takes On GameStop's Better-Than-Anticipated Q3

GameStop Corp. GME reported its third quarter results that were better than expected but don't fully erase Wall Street's concerns moving forward.

The Analysts

Bank of America's Curtis Nagle maintains a Neutral rating on GameStop's stock with a price target raised from $20 to $23.

Loop Capital Markets' Anthony Chukumba maintains a Buy rating on GameStop's stock with an unchanged $28 price target.

The Not-So-Positive Thesis

GameStop's better-than-expected earnings report was driven by strong sales of Nintendo's Switch console in the quarter, but the ongoing trend of gamers bypassing physical stores and downloading games directly on their consoles remain a headwind for GameStop, Nagle said in a research report. Gamestop also realized a sharp decline in store productivity in Q3, mostly due to pressure from AT&T Inc. T to compensate GameStop more on DirecTV and digital service sales than mobile phones, the analyst said. 

The bottom line from BofA: The Q3 print coupled with continued strength in the collectibles business puts a "floor on valuation for the time being, all else equal."

The Positive Thesis

GameStop's Q3 report included many "encouraging" signs, Chukumba said in a note. These include:

• The first new video game software sales growth seen in several quarters.
• A notable improvement from the second quarter in the pre-owned and value video game products.
• A 26.5 percent growth in collectibles.

The technology brands segment underperformed, although this was expected due to the delayed launch of the iPhone X, the analyst said. Nevertheless, GameStop  encouragingly kept its fiscal 2017 EPS guidance, which reinforces the bullish case, Chukumba said. 

GameStop's stock is trading at less than 5x the analyst's fiscal 2018 diluted EPS estimate, which implies a Buy rating is "appropriate" given the company's recent growth and strong free cash flow. An 8.0x multiple is justified, Chukumba said. 

Price Action

Shares of GameStop were trading higher by 5.47 percent at the time of publication but are still down nearly 30 percent since the start of 2017.

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