GameStop share price gains despite earnings miss and cash burn

Any hopes that GameStop's share price movements would resume some relationship with its business fundamentals appear to be misplaced. The stock gained nearly 4% in after-hours trading following a poor set of results that missed earnings and revenue expectations and saw cash reserves depleted by $609m.

- GameStop posts earnings and misses revenue target

- Management points to "unprecedented" transformation effort

- Roundhill Meme Stock ETF has a 3.52% weighting in GameStop

Having grabbed headlines during the meme stock craze of early 2021, GameStop's [GME] share price has continued to fluctuate heavily in 2022. 

In the year to December 7, it has fallen 40% — not a strong performance in an average year. Still, considering that Amazon's [AMZN] stock has fallen by 43% in the same period, the hopeful "Amazon of gaming," as per GameStop chairman Ryan Cohen, isn't doing so poorly.

With the stock down 74.4% since closing at $86.88 high on January 27, 2021, those who shorted the stock at its highs stand to net around $152m this year on top of over $4bn last year. Among those winners is Carl Icahn, who made news for shorting the stock last month.

However, GME has traded above $21.50 since late May. A modest share price decline of 3.4% took place after a data breach that exposed customer addresses and credit card details on the company's website over Black Friday weekend.

Stock rises despite earnings miss 

The company's third-quarter earnings, released after markets closed on December 7, could have allowed GameStop's share price to return to normal, as it has been significantly detached from its fundamental performance for almost two years.

GameStop's sales declined 8.6% year-over-year to $1.2bn, falling 11.9% short of analysts' expectations of $1.35bn, according to polls by the Financial Times. While non-GAAP losses per share narrowed 11.4% year-over-year to $0.31, they still missed analysts' expectations of a $0.28 loss. GameStop also reported a sharp decrease in its cash reserves, with cash and cash equivalents falling roughly $609.2m, from $1.4bn the previous year to $803.8m.

No forward guidance was included as part of the results announcement. During the investor call, GameStop CEO Matt Furlong told investors that the company is "not providing formal guidance at this time."

Nevertheless, in a testament to its meme stock status, GameStop's stock rose 3.95% in after-hours trading following the results. 

GameStop's modernisation plan

In the investor call, Furlong emphasised the "unprecedented" transformation that GameStop management is attempting to turn a retail company "once on the brink of bankruptcy" into a profitable enterprise. 

Efforts to do so have included the launch of an NFT marketplace and cost-cutting measures, including layoffs that were announced in July. Further staff cuts reportedly have taken place by stealth in the run-up to the earnings report. Furlong didn't comment on layoffs directly during the call, besides a reference to "reductions in corporate headcount" that will drive a large portion of cost cuts.

The US Securities and Exchange Commission (SEC) made it clear in a recent video that it views meme stocks as a poor investment, encouraging young investors to research stocks before investing. 

However, despite calls for the trade in meme stocks to be more heavily regulated, it is still being determined what kind of regulations could realistically be imposed, especially given the pushback from market makers like Robinhood [HOOD] to recent reforms to the proposed payment-for-order system.

Fund in focus: The Roundhill Meme Stock ETF

As far as most meme stocks go, GameStop is having a reasonably strong year. The Roundhill Meme Stock ETF [MEME] has a 3.52% weighting in GameStop as of December 7. The fund is down 1.7% in the past month and 58% year-to-date and holds Robinhood at a 4.03% weighting.

While MEME captures stocks whose performance varies "because of social media attention which may result from a variety of factors unrelated to the company's performance," another ETF offers exposure to GameStop and other stocks with similar high publicity but a steeper slant towards positive coverage. 

The VanEck Social Sentiment ETF [BUZZ] tracks an index comprised of "the 75 large-cap US stocks which exhibit the highest degree of positive investor sentiment and bullish perception" based on material published online. As of December 7, BUZZ has a 2.81% weighting in GameStop and 1.49% in Robinhood. The fund has fallen 44.3% year-to-date and 0.5% in the past month.