Bank Of America Turns Bearish On GameStop, Sees Too Many Headwinds

GameStop Corp. GME reported fourth quarter results, which included a top-and-bottom-line beat but at also convinced Bank of America to turn bearish on the stock.

The Analyst

Bank of America's Curtis Nagle downgraded GameStop's stock from Neutral to Underperform with a price target lowered from $19 to $11.

The Thesis

A cautious stance on GameStop's business was justified heading into the company's earnings, but the report made it clear the business is facing multiple structural headwinds that will continue hurting profits, Nagle said in the note. Some of the headwinds include game publishers shifting towards higher margin direct download offerings, growing popularity of online games for which GameStop has minimal exposure to, and rival game sellers like Amazon Prime offering discounts on games.

Nagle said these headwinds could also impact GameStop's pre-owned gaming business, which has been historically a "critical source" of operating profit. GameStop's non-gaming businesses like collectibles and Tech Brands were intended to offset losses in the core gaming business, the analyst wrote. However, while both businesses performed well so far the fact is increasing market competition is "likely to impede" earnings growth.

GameStop's 55 million PowerUp Rewards members remains compelling, but it's only strong enough to partially offset and not stop the multiple headwinds impacting multiple business lines.

Price Action

Shares of GameStop were trading lower by more than 10 percent at $12.65 early Thursday morning.

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