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GameStop Earnings Preview: FTX Collapse, Video Game Demand In Focus As Short Sellers Stalk Retailer

With short-sellers extending bets on its demise, video game demand slumping and its recent partnership with FTX now in shreds, GameStop faces a tough road ahead.

Updated at 10:11 am EST

GameStop  (GME) - Get Free Report shares moved lower Wednesday ahead of the video game retailer's third quarter earnings after the close of trading with investors focused on the impact of FTX's spectacular collapse on its digital asset plans and fading demand in the gaming sector.

GameStop is expected to its seventh consecutive quarterly loss, with analysts expecting a bottom line of -28 cents per share over the three months ending in October as overall revenues fall 4.5% from last year to around $1.355 billion. Analysts are also likely to keep a keen eye on expenses, as well, following a big jump in SG&A last quarter to $378.9 million, nearly a third of overall sales.

To that end, reports this week suggest GameStop is paring staff with another round of layoffs, this time focused on the group's blockchain and NFT unit, which began expanding earlier this year following a deal with now-bankrupt crypto trading platform FTX.

GameStop, which is hoping to transition from a reliance on brick-and-mortar sales to a larger and more dynamic presence online, has slashed its headcount in order to minimize the cash burn required to build-out its non-fungible tokens, or NFT marketplace following a tie-up earlier this year with Australian blockchain startup ImmutableX.

The group is hoping its GameStop Wallet, which allows users to store, send, receive and use both NFTs and cryptocurrencies across decentralized apps, will form the lynchpin of its digital asset strategy. 

GameStop had unveiled plan in September to sell FTX US gift cards at its stores, a partnership it said was part of a plan to "introduce more GameStop customers to FTX’s community and its marketplaces for digital assets". 

Broader video game demand is also in decline, with FIFA and Apex Legends maker Electronic Arts  (EA) - Get Free Report warning on weak end-of-year sales and Take-Two Interactive  (TTWO) - Get Free Report issued a downbeat holiday season forecast only last month.

GameStop shares were marked 2.13% lower in early Wednesday trading to change hands at $22.93 each, a move that would still leave the stock with a year-to-date decline of around 40%.

Most of the stock's decline, however, was triggered on August 16, when Chairman Ryan Cohen revealed plans to dump his entire stake in another meme stock -- Bed, Bath & Beyond  (BBBY) - Get Free Report -- after only five months as an investor.

Cohen's sale of 9.45 million shares netted him a profit of around $60 million, but sparked a backlash among some retailer traders who felt the billionaire activist investor had used their buying momentum to make a quick turnaround trade. 

Late last month, Bloomberg reported that billionaire activist investor Carl Icahn began shorting GameStop shares at the peak of the meme-stock frenzy last year, which lifted the stock to as high as $81.25 each (on a split-adjusted basis) in late January of 2021.

Recent data from S3 Partners suggests short interest in GameStop shares represents around 20.6% of the group's outstanding float, a figure that amounts to bets of around $1.39 billion.