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GameStop’s revenue surprise is squeezing shorts. Meme shares rise.




GameStop’s first profitable quarter since January 2021 sent the stock soaring. The move pressures short sellers and lifts AMC Entertainment and Bed Bath & Beyond shares as well.

GameStop shares (ticker: GME ) were up 33%, at $23.56, in recent trading, paring some gains seen in premarket trading. On Tuesday night, the company reported earnings of 16 cents per share, well above the loss of 16 cents per share that Wall Street analysts were expecting. AMC Entertainment Holdings ( AMC ) was up 3.5%, and Bed Bath & Beyond ( BBBY ) was up 2%.

Ihor Dusaniwsky, managing director of predictive analytics at short-selling data firm S3 Partners, said Barron’s that around 56.1 million GameStop shares were recently sold short. A short seller borrows shares and sells them immediately, with the goal of buying the same number of shares at a lower price in the future. If the stock falls, the difference is their profit, minus loan fees.

“I expect a wave of short covering tomorrow if this price level holds and the short squeeze begins,”[ads1]; Dusaniwsky said as shares rose in after-hours trading on Tuesday.

The profitable quarter blew up in the face of short positions. Critics of GameStop say the company’s business selling used video game discs is in decline, and the stock is backed by enthusiastic retail investors hoping to revive the rise in meme stock in January 2021. Although GameStop’s software sales fell 15% year-over-year to 670 .4 million, their efforts to rein in costs and stronger sales of hardware and collectibles surprised Wall Street.

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Jefferies analyst Andrew Uerkwitz maintained a Hold rating and $20 price target in a note following the report on Tuesday. He said GameStop showed progress in cutting costs, although he noted that overall sales were down 1% year over year. He pointed to increased availability of newer video game consoles, such as the PlayStation 5, which benefited the retailer.

If GameStop can put together more profitable quarters, it can operate longer without raising money through new stock sales. Even before its meme stock status, the January quarter — which includes the holiday season — was always when the company made the bulk of its annual profits.

Although GameStop has attracted similar enthusiasm from private investors to AMC and Bed Bath & Beyond, profitability could help it set itself apart. The company gave no outlook for the fiscal year’s first quarter. Wall Street will likely want to see sustainable profits before changing its tune on the retailer.

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Uerkwitz is forecasting an earnings before interest, taxes, depreciation and amortization (Ebitda) loss of $62 million for the fiscal year ending in January 2024. That’s an improvement from his previous estimate of $79 million.

“The early signs of costs are encouraging, and [we] expects profitability again i [the January 2024 quarter]but want to see the impact in the non-holiday quarters before modeling a positive EBITDA for the full year,” he wrote.

Wedbush analyst Michael Pachter, who last week maintained an Underperform rating and $5.30 price target on GameStop shares, remains not optimistic.

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“They’re cutting costs a lot, which is an encouraging sign, but it’s not likely they can save the road to prosperity,” he said Barron’s. “I think the results are a one-off effect and expect a return to losses going forward.”

For now, though, it’s the meme crowd that’s taking a victory lap.

Write to Connor Smith at connor.smith@barrons.com and Adam Clark at adam.clark@barrons.com



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