Shares of GameStop (GME - Free Report) were up over 9% in early morning trading Monday after the struggling video game retailer gained renewed confidence from investors on the back of Cyber Monday hopes and an analyst upgrade.
It was Bank of America Merrill Lynch that helped life the spirit surrounding GameStop, with analysts at the firm upgrading the stock to “Neutral” from “Underperform” and arguing that recent selling has made a fundamental case for the retailer.
“Even with free cash flow dwindling to under $100mn by 2020, for now there is ample cash for capital return and we see less risk to the dividend which yields 11%,” wrote BAML’s Curtis Nagle.
Positive analyst sentiment has been limited for GameStop in recent years, as a shift to digital downloading and away from physical games battered the company’s core business. Shares have declined over 70% in the past half-decade, forcing management to find new ways to attract shoppers by adding more items in the vein of collectibles and apparel.
But it seems to be the core video game business that has also contributed to today’s rally. Investors hit the markets Monday looking for ways to cash in on what was likely a historic Black Friday—and what will likely be a record-breaking Cyber Monday—and GameStop stood out.
The company is leveraging its e-commerce platform to promote a variety of enticing deals for Monday’s online shopping holiday, including offers on hot franchises such as Tomb Raider, Assassin’s Creed, and NBA 2K. GameStop is also offering free shipping on orders over $35 and $50 gift cards on orders of certain consoles.
GameStop shares opened about 3.6% higher at $13.99. The stock rallied further in morning trading, eventually touching an intraday high of $14.77—about 9.4% above its Friday close.
Investors will hope GameStop can carry this momentum through its earnings report date later this week. For the to-be-reported quarter, analysts expect GameStop to post adjusted earnings of $0.56 per share and revenue of $2.04 billion, according to our latest Zacks Consensus Estimates. These results would represent year-over-year growth rates of 3.7% and 2.6%, respectively.
Sentiment for the third quarter is mixed, however. The company’s earnings consensus has dropped over the duration of the period, but a positive estimate revision in the past 30 days has lifted the projection off its lows by a penny.
GameStop missed earnings estimates by 37.5% in its previous quarter. This result, and a pair of negative revisions to estimates for full-year and next-year earnings, has kept the stock at a Zacks Rank #4 (Sell).
Nevertheless, GameStop does sport an “A” grade in the Value category of the Zacks Style Scores system. Shares are trading at just under 4.5x earnings, which represents a steep discount to the “Retail - Consumer Electronics” industry’s average of 12.1x.
GameStop will release its most recent quarterly results after the closing bell on Thursday.
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