GameStop (GME) recently made it onto Zacks.com's list of Most Searched Stocks, therefore, it may be wise to consider some key factors that could impact this stock's performance in the near future.
Shares of the video game retailer have returned -8% over the past month versus a +1.5% change for the Zacks S&P 500 composite index. The Zacks Gaming industry, which GameStop belongs to, has lost 1% in that period.The big question here is, where is this stock headed in the near term?
While media reports or rumors of major changes in a company's business prospects usually influence the movement of that company's share price, leading to immediate price movements, there are always certain fundamental factors that ultimately drive a buy-and-hold decision.
Earnings forecast revision
At Zacks, we prioritize evaluating the changes in a company's earnings estimates over other factors because we believe the fair value of a stock is determined by the present value of its future earnings stream.
It essentially looks at how sell-side analysts covering the stock are revising their earnings forecasts to reflect the impact of the latest business trends. As a company's earnings forecasts rise, so does the fair value of its stock. If the fair value is higher than the current market price, investors will be interested in buying the stock, driving the share price up. This is why empirical studies have shown a strong correlation between trends in earnings forecast revisions and short-term stock price movements.
For the current quarter, GameStop is expected to post a loss of $0.01 per share, which would represent a +66.7% change from the year-ago period. The Zacks Consensus Estimate has remained unchanged within the past 30 days.
The consensus revenue estimate for the current fiscal year is $0.08, indicating a change of +33.3% year over year. This estimate has not changed in the past 30 days.
Looking at the next fiscal year, the consensus earnings estimate is $0.02, which represents a 75% decrease from what GameStop was expected to report a year ago, with estimates unchanged over the past month.
The Zacks Rank, our proprietary stock rating tool that has an impressive outside-audited track record, effectively harnesses the power of earnings estimate revisions and is a more reliable indicator of near-term stock price movements. The magnitude of the recent change in consensus estimates, along with three other factors related to earnings expectations, has earned GameStop a Zacks Rank #3 (Hold).
The story continues
The chart below shows the evolution of the company's consensus EPS estimates over the next 12 months.
12 Month EPS
Revenue Growth Forecast
Revenue growth is arguably the best indicator of a company's financial health, but if a company can't grow its revenue, then nothing happens. After all, it's nearly impossible for a company to grow its revenue over the long term without growing its revenue. Therefore, it's important to know a company's revenue growth potential.
For GameStop, the consensus estimate for sales for the current quarter is $900 million, indicating a -22.7% increase/decrease year-over-year, while estimates for the current and next fiscal years are $4.13 billion and $3.7 billion, indicating increases/decrease of -21.6% and -10.5%, respectively.
Last reported results and surprise history
GameStop reported revenue of $881.8 million in the most recent quarter, down 28.7% year over year. EPS was -$0.12 for the same period, compared to -$0.14 in the same period last year.
Compared to the Zacks Consensus Estimate of $900 million, reported revenues represented a surprise of -2.02%. EPS surprise was -20%.
Over the last four quarters, GameStop has beaten EPS estimates two times. The company has beaten revenue estimates just once during that period.
evaluation
No investment decision can be made efficiently without taking into account stock valuation. Whether a stock's current price properly reflects the intrinsic value of its business and the company's growth prospects is a key factor in determining future stock price movements.
Comparing the current value of a company's valuation multiples such as Price to Earnings (P/E), Price to Sales (P/S) and Price to Cash Flow (P/CF) with the company's historical values helps in determining whether the stock is fairly valued, overvalued or undervalued, while comparing a company with its peers on the basis of these parameters gives a good sense of the fairness of the stock's valuation.
The Zacks Value Style Score (part of the Zacks Style Scores system) pays close attention to both traditional and non-traditional valuation criteria to rate stocks from A to F (with An being better than B, B being better than C, etc.), which can be very helpful in identifying whether stocks are overvalued, fairly valued or temporarily undervalued.
GameStop is rated a C on this score, indicating that it is trading in line with its peers. Click here to see the values of the valuation metrics that drove this rating.
Conclusion
The facts discussed here, and many other information on Zacks.com, may help you decide whether the market buzz surrounding GameStop is worth following, although its Zacks Rank #3 suggests it may be capable of performing in line with the overall market in the near term.
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