Top Analyst Cuts Price Target on GameStop Corp. (GME) Stock Following 4Q Earnings Show

Colin Sebastian nonetheless still spots 40% in return potential for the video game retailer stock.

GameStop Corp. (NYSE:GME) shares are crashing 9% even though the video game retailer closed off fiscal 2017 strong, with a sturdy fourth quarter beat- mainly due to guidance for fiscal 2018 that has left Wall Street underwhelmed.

Top analyst Colin Sebastian at Baird sees the quarterly earnings show as a “solid finish,” mirroring Switch strength and momentum from new holiday software.

As such, the analyst reiterates an Outperform rating on GME stock. That said, Sebastian likewise cuts the price target from $23 to $18, which implies a 40% upside from current levels.

“GME reported solid 4Q17 results driven by lower-margin Switch hardware revenues, and strong contributions from new software. New CEO Mike Mauler announced a pivot towards optimizing existing stores and operations, including aiding awareness in the pre-owned category, albeit on lower segment margins (advertising and promotion.) Our lower price target reflects this shift; however, value-oriented investors could benefit from potential catalysts in Switch sales, revamped AT&T contract, E3 announcements and fall software lineup,” highlights Sebastian.

Standout elements of the print include new hardware, which soared 44.8% year-over-year in growth- quite a rise against the 8.8% year-over-year growth seen in the third quarter. Moreover, the analyst commends a sustained upturn in new software sales, which rose 12.4%, more than doubling the 5.4% momentum seen in the third fiscal quarter of 2017. These sales took advantage of an extra week compared to the year before along with meaningful gains in Call of Duty units.

Yet, Tech Brands revenues maintained a dip between product refocus and iPhone challenges, falling 14% year-over-year- more than the 10% seen in the fiscal third quarter. “Tech headwinds likely persist until AT&T contract terms modified,” explains the analyst, who recognizes the compensation structure had been unveiled in the first quarter. Sebastian continues, “On the call, management indicated FY18E tech brands operating profit should improve Y/ Y, but uncertainty around AT&T contract negotiations clouds the near-term outlook.”

All the same, total revenues hit a robust $3.5 billion, a notch over consensus of $3.27 billion on SSS growth of 12.2%- likewise beating out the Street’s 10.5%. Non-GAAP EPS also outclassed the Street by $0.03 on back of revenue upside. Collectible segment sales jumped 23% year-over-year, compared to 26.5% in the third fiscal quarter, and Sebastian spotlights this segment as evolving into a key feature of GME’s diversification strategy. However, full-year segment revenues did not quite meet GameStop’s internal target expectations.

“FY19E guidance reflects collectibles strength to offset MSD video game declines,” the analyst concludes, which keeps him positive even with a non-GAAP EPS guide of $3.00 to $3.35 that underclassed the Street’s $3.32 estimate.

Colin Sebastian has a very good TipRanks score with a 74% success rate and a high ranking of #14 out of 4,759 analysts. Sebastian yields 24.5% in his yearly returns. When recommending GME stock, Sebastian earns 3.5% in average profits on the stock.

TipRanks indicates mostly bullish sentiment circling this video game retailer. Out of 5 analysts polled in the last 3 months, 3 rate a Buy on GME stock, 1 maintains a Hold, while 1 issues a Sell. With a return potential of 43%, the stock’s consensus target price stands at $18.50.

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