GameStop stock chart shows bearish earnings warning

GameStop (NYSE:EMG) does not trade well past earnings. The company reported after the December 8 close, with GME shares falling just over 10% the following day.

Source: Shutterstock

On Friday, GameStop had a chance to repair some of the technical damage. However, the stock did not fare well as the markets swirled.

I know that not everyone who reads financial articles is a technically oriented investor or trader. However, those who mix the two analyzes – technical and fundamental – or at least consider the technical aspects, should be aware of how the chart is currently set up.

We’ll get to the numbers in a minute, but let’s look at the charts first.

Trading GME shares

Overall, the look of the GME stock is not good. Aside from its 10% drop in profits, GameStop was down more than 4% for more Friday too.

The bigger issue is that stocks have been dropping each week below last week’s low near $159. Now, if he could have recovered that level on Friday, he would have negated some of that damage.

He did not recover this level, but the boy approached it.

On December 10, GameStop was down 4% to 5% for most of the session. However, in the last hour it has been rising – ending the session up 2.1% and closing the week at $159.01. That’s four hundred below last week’s low.

This leaves traders in a rather difficult position with GME shares. We’re not going to split hairs for pennies. So what we need to see is simple.

Below $159, GameStop is vulnerable to further decline. Specifically, this has me looking at the third quarter low at $145.22, which is not that far off. Below that, and we could see further weakness in the mid $130s.

If the selling pressure is really building, you know there will be bears targeting the $100 level.

On the upside, however, GME stock definitely needs to rally above $159 and then its 10-day moving average. If he can do that, he opens the rest of his moving averages. For the bulls to really gain momentum, the stock needs to clear these metrics.

Currently, this signifies a move above the $195 level. If we can get that, then the bulls could very well regain control and $250 could be on deck.

Lack of GameStop payouts

The company posted revenue of $1.3 billion, beating analyst estimates of $107 million and growing 29% year-over-year (YOY). However, the gains were not as good. GameStop lost $1.39 per share, severely missing expectations of 87 cents per share.

To be fair, though, the reason behind the lack isn’t that bad – at least in my eyes. Management has preloaded its inventory to avoid supply chain issues ahead of the holidays.

While this leaves GameStop vulnerable to inventory risk, the flip side is a situation like Difference (NYSE:GPS). This retailer has had supply chain issues and suffered a massive decline in revenue in its most recent quarter, forcing management to cut its outlook.

Then another negative point was the increase in hardware sales and the reduction in software sales. Hardware as a percentage of revenue climbed to 51.7% in the last quarter from 41.2% a year ago. Meanwhile, software sales fell to 33.5% of sales from 44.2% a year ago.

It’s not the end of the world of course. But investors like to see the shift in sales from software to hardware, as a percentage of total revenue. Not the opposite.

It was good to see the company end the quarter with cash and cash equivalents of $1.41 billion and no debt “other than a $46.2 million low-interest unsecured term loan associated with the French government’s response to COVID-19.”

Conclusion on GameStop stock

All things considered, honestly, I didn’t find the quarter that bad. Obviously, there are some things we’d like to see – like a profit – and GameStop isn’t the best way to game the gaming industry, in my opinion.

However, as far as quarterly reports go, it wasn’t exactly a disaster.

That said, the charts need a helping hand before they turn bullish. At best, the technical aspects seem hazy and, at worst, have serious warning signs. It doesn’t help that the fundamentals aren’t supporting this one.

Additionally, analysts expect a year down slightly revenue next year and revenue growth of just 9% in 2023. Neither this year nor next year is expected to generate profits. Despite this, GameStop stock commands a market capitalization of $12.1 billion.

When we mix technicals and fundamentals, it’s hard for me to be overly optimistic. As a trade, that could change, but the stock needs to prove itself from here.

As of the date of publication, Bret Kenwell had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Bret Kenwell is the director and author of Future Blue Chips and is on Twitter @BretKenwell.

Karen J. Nelson