GameStop (NYSE: GME) stock price has been in a freefall this year as investors remain concerned about the company’s future as demand for physical games waned. The stock has plunged by over 37% this year, making it one of the worst-performing retailers in the US.
In contrast, the SPDR S&P Retail ETF (XRT) is barely moved this year and is up by over 15.8% in the past 12 months while GME is down by over 45%.
Good balance sheet but trends are worryingGameStop has one of the best balance sheets in the retail sector. It has huge sums of money in its balance sheet and almost no debt. It ended the last quarter with over $921 million in cash and equivalents and over $277 million in short-term investments.
Looking at the other side of the balance sheet, the company has no short-term debt and has over $17 million in long-term debt.
The challenge for GameStop is that it is in an industry that is facing a slow death as most people are now buying games online. There are also signs that the gaming console market is moving in the wrong direction.
The industry, which is valued at about $200 billion, is going through its worst slowdown in over 30 years. At the same time, game companies like EA Sports and Take Two have released underwhelming results in the past few quarters.
Take Two Interactive’s stock has plunged by over 16% from its highest point this year while Electronic Arts has dived by 11%. There are also signs that Microsoft is exiting the console business as its growth slows.
The best evidence of all this is the most recent GameStop earnings. Its revenue came in at $6.4 billion in 2020 and moved to $5.2 billion last year. The average estimate of its revenue for 2024 is $4.79 billion followed by $4.57 billion in 2025. This trajectory will likely continue.
Therefore, most analysts believe that turning around GameStop is a futile act and that the company will ultimately go out of business. As such, at this stage, in my view, it would make sense for the company to use its cash balance to pay dividends, take debt, and later on declare bankruptcy.
Remember, the recent actions by the company to diversify its business have not worked out well. It moved into the NFT industry did not work out. And in the recent quarter, its collectibles division made $233 million in revenues, down from $313 million a year earlier.
For the year, the collectible’s division revenue dropped to $754 million from $964 million a year earlier.
GameStop stock price forecast
The daily chart shows that the GME share price has been in a strong bearish trend in the past few years. It has constantly remained below the 50-day and 100-day Exponential Moving Averages (EMA).
The stock has also formed a falling wedge pattern that is shown in yellow. In most cases, this pattern is usually a sign of a bullish reversal.
With the wedge now nearing the confluence level, there is a likelihood that the stock will rebound in the coming weeks. That will likely happen on May 6th when the firm publishes its financial results.
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