What happened?
GameStop Corp. announced on Tuesday that its sales will fall in 2019 by 5-10%. The past results are also uninspiring. In Q4 of 2018, total sales from continuing operations plunged by 7.6% year over year. The profit per share accounted for $1.45 in Q1, while analysts expected a reading of $1.58. The news provoked an 18% fall in the company’s stock.
Why is it important?
In general
These are the troublesome times when analysts speculate about the probability of a recession in the United States. So, every time a big company worsens forecasts for its financial results revives the market’s concerns. However, the situation with GameStop is specific as the company has its own pain which is related to its strategy rather than the market in general.
For investors
It’s hard for GameStop to adapt to changes that are happening in the game industry. The largest independent retailer of video games suffers as gamers switch to online purchases. It doesn’t help that more than one-third of GameStop’s gross profit in 2018 was related to used video game products that risk vanishing in the future.
In addition, competition is getting tougher. In March, Apple and Google announced their online services for games. Activision Blizzard Inc. obviously felt the spirit of the battle as it decided to offer Call of Duty game free online during April.
GameStop plans to improve the situation by cutting costs, but it’s hard to see how this can solve its problems in a fundamental way. The company will keep facing issues until it abandons the current business model.
For traders
If we look at bigger timeframes, we will see that GameStop is in the downtrend since 2013. The stock opened with a gap below $9.00 on Wednesday but then managed to close it. Resistance is at $10.00 and $11.00. The recovery will likely be temporary as it’s hard to believe that investors will show much interest in the company.
Stocks can be traded as CFDs at eToro.
