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GameStop's Q3 Earnings Review: Look on the Bright Side

Despite failing to beat Wall Street's estimates, GameStop's third-quarter earnings weren't terrible. Here's why investors should look on the bright side.
  • GameStop's third-quarter earnings failed to impress Wall Street by missing both EPS and revenue estimates.
  • GameStop shares rose as much as 12% during the following trading session.
Figure 1: GameStop's Q3 Earnings Review: Look on the Bright Side

Figure 1: GameStop's Q3 Earnings Review: Look on the Bright Side

Read also: GameStop Stock: Half a Million More Shares Registered With GME's Transfer Agent

GameStop's Q3 Earnings Overview

On December 7, video game retailer GameStop  (GME) - Get Free Report reported an all-around miss in its third-quarter (Q3) earnings results.

The company booked a loss of 31 cents per share, versus an estimated 28-cent loss.

And sales results didn't come in as expected — particularly for hardware and software, GameStop's main markets. The company reported $1.19 million in revenue, missing estimates by $168 million. This equaled a drop of 8.5% compared to the same period last year.

According to GameStop, about $50 million of the revenue decline was due to forex exchange (FX) impacts.

The company reported net losses of $95 million in Q3, totaling a net loss of $354.9 million so far in 2022. However, GameStop is still sitting on a large cash pile of about $1 billion — about $400 million short year over year.

Even though, at first hand, the results look weak — and inspired more bearishness from Wall Street — the markets reacted positively during the next day's trading session. GameStop shares jumped as much as 12% on the morning of December 8.

Why So Bullish?

The bullish reaction after the earnings report can be explained by the fact that, although GameStop missed Wall Street's expectations, it didn't miss its own.

As GameStop's management put it a few months ago, in the third quarter, the company's objective shifted to short-term profitability and cost-cutting due to rising interest rates and inflation.

Arguably, GameStop has made some progress in this direction, especially considering the deterioration of macroeconomic conditions in 2022 compared to last year.

This can be seen in Q3's SG&A (selling, general, and administrative) results. SG&A expenses came in at $387.9 million, or 32.7% of sales, compared to $421.5 million, or 32.5%. The net loss in the third quarter of about $95 million was still less than the $105.4 million lost in Q3 last year.

Even though GameStop is still burning cash quarterly, its balance sheet has over $1 billion in cash, and the company is virtually debt-free. That will provide extra cushion for GameStop in the case of a recession.

However, perhaps the most positive news of the quarter was GameStop's cash flow finally turning positive. It was reported at $177.3 million, compared to an outflow of $293.7 million last year. This means that more cash is coming in than going out, which is essential to GameStop management's long-term goal of sustained long-term growth.

"We're seeking to transform a legacy brick-and-mortar business that was on the brink of bankruptcy into a retailer that meets customers' needs through our stores, e-commerce properties, and emerging sales channels," said CEO Matt Furlong.

GME's Direct Registration Update

Among the most anticipated results of GameStop's Q3 was an update on the number of GME shares registered directly with the company's transfer agent.

Direct registration makes it possible for investors to hold shares without needing a brokerage house. In theory, this prevents short sellers from being able to borrow shares, because transfer agents cannot lend shareholders' shares — unlike most brokers.

In recent quarters, GameStop has been disclosing the number of shares registered with its transfer agent on its Form 10-Q.

According to the latest data, approximately 71.8 million shares were registered with the transfer agent through October 29, 2022. This represents an increase of 500,000 shares directly registered since the last update on July 30.

Considering that GameStop's float currently stands at 253.54 million shares, nearly 30% of the float is registered with the transfer agent.

Even though GME bulls had expected that the updated registered share count would be higher, an increase of half-a-million shares in one quarter is not bad at all.

This is because you have to consider the current bear market that has challenged the resilience of GME bulls. GameStop's stock has fallen as much as 30% this year.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)