GameStop Stock Is Tumbling

GameStop stock was falling fast on Wednesday after the company’s fiscal fourth-quarter results disappointed analysts. There’s also another elephant in the room: The company is considering selling more stock, which could dilute its shares.

GameStop stock (ticker: GME) closed down 33.8%, at $120.34. The S&P 500 index fell 0.6%, while the Dow Jones Industrial Average ended flat.

In a filing with the Securities and Exchange Commission, GameStop said it has been evaluating whether or not to increase the size of its previously announced $100 million at-the-market stock-sale program. The company had announced the ATM program in December, with Jefferies acting as the sales agent. The company said it didn’t sell stock as its valuation surged.

GameStop stock received a mix of downgrades, price target cuts, and raises from analysts following the report. “Many on Wall Street have wondered why GameStop has not done an ATM transaction to take advantage of the elevated share price,” Telsey Advisory Group analyst Joseph Feldman wrote. “The answer may be that its balance sheet is in great shape, with cash and cash equivalents of $635MM (incl. restricted cash of $110MM) and debt of $363MM at the end of 2020. The new commentary seems to be a signal that an ATM transaction could be on the way.”

Heading into Tuesday, Feldman had the highest price target listed by FactSet. He lowered his to $30 from $33, calling the event “anti-climactic.” On the flip side, Jefferies analyst Stephanie Wissink raised her target by 1,066% to $175. That’s the new Street-high, in case there was any doubt.

Wissink argued the moves by Chewy co-founder and GameStop board member Ryan Cohen to transform the company into more of a technology firm warrant a completely different valuation method. The company’s earnings release was paired with another trio of hires with e-commerce backgrounds, including Amazon alum Jenna Owens as its next chief operating officer.

Wissink wrote that she moved from basing her target on earnings before interest, taxes, depreciation, and amortization, or Ebitda, to a sales multiple that factors in a shift to e-commerce.

She also makes the point that GameStop has the potential to participate in the rise of non-fungible tokens, or NFTs, and the hosting of shoppable content streams.

“As a result, we expect store closures to persist & sales to transfer to dot com,” Wissink wrote. “Total revs may come down, but value per dollar of sales should increase if non-retail streams are realized.”

S&P Global Ratings analysts Mathew Christy and Andy Sookram wrote in a note on Wednesday that they believe the turnaround will involve sizable execution risks and possibly a material increase in its capital investment.”The recent increase and volatility in GameStop’s share price have not affected our fundamental view of its business or the risks the company faces,” they wrote. “However, we note the potential financial flexibility afforded by its improved equity market standing if it chose to raise additional capital to reposition its business or reduce its debt.”

BofA Global Research analyst Curtis Nagle maintained his $10 price objective and Underperform rating. He notes that while GameStop’s adjusted earnings per share of $1.34 beat his estimate for $1.22, he notes that the beat was driven by a large tax credit during the quarter. The company’s Ebitda came in short of his expectations by 66%.

“We continue to be very sceptical on GME’s efforts to address its long standing issue of digital disintermediation and the fact that its core market in new and pre-owned physical console gaming is shrinking at a rapid pace,” Nagle added. “GME also called out leveraging its existing digital assets like its PowerUp rewards program but this has seen declining engagement for years.”

Wedbush analyst Michael Pachter lowered his rating on GameStop to Underperform from Hold, but raised his price target to $29 from $16. While he still thinks GameStop is well-positioned to benefit from the new consoles from Sony and Microsoft, he says the short squeeze has spiked the stock to “levels that are completely disconnected from the fundamentals of the business.”

“Our downgrade isn’t a reflection of our opinion of company management, which remains very high; rather, it appears that the ‘real’ value of GameStop shares (the price willing buyers are prepared to pay in the open market) vastly exceeds the ‘fundamental’ value we believe investors expecting a financial return can reasonably expect,” he wrote.

Chip makers are fighting to assure investors that the artificial-intelligence boom is racing forward. Wall Street might not believe it until Nvidia’s NVDA -0.98%decrease; down pointing triangle Jensen Huang says so.

When Huang steps up to the mic for his company’s earnings call Wednesday, he will have the world’s attention. What he says about Nvidia’s present will preview the future of AI, dictate the path forward for a tech-crazed stock market and influence an American economy increasingly tethered to hopes that the boom won’t go bust.

The $5 trillion chip maker has provided the key building blocks for AI since the launch of ChatGPT in 2022 set off a race for dominance among OpenAI, Anthropic and established Silicon Valley giants. Now, as Nvidia backstops sprawling data-center projects and an exotic money pipeline to boost chip demand, the company’s influence is arguably bigger than ever.

But there are signs of trouble ahead. Political pushback to AI is growing. A bond selloff propelled borrowing costs to their highest levels in years. The hyperscalers that include some of Nvidia’s key customers—once cash-printing machines—are relying more on debt. OpenAI recently told investors its revenue rose by a tepid 18% in the second quarter while its losses deepened.

Nvidia is increasingly stepping in to shore up potential weak points across the market. Earlier this month, the company teamed up with six of Wall Street’s biggest firms on a $500 billion AI-financing plan, pledging to backstop lending to customers that can’t afford its chips otherwise. The chip maker last week also took a stake in Cloverleaf Infrastructure, which arranges power for data centers, and struck a $6 billion deal with startup Poolside aimed at developing a powerful open-weight AI model.

After watching shares in other chip makers and the so-called Magnificent Seven tech companies swing wildly in recent months, Wall Street is hoping Nvidia can beat expectations—again. The countdown is on.

“It’s kind of becoming more and more like the World Cup final than the Super Bowl at this point,” said Brian Mulberry, chief market strategist at Zacks Investment Management. “It’s just gotten to be that big.”

The company has smashed analysts’ earnings estimates for each of the 14 quarters since the AI boom kicked into high gear. Nvidia posted 210% annual growth in net income in its last three-month period, according to FactSet, making Wall Street’s 126% projection look pedestrian.

Expectations for a blowout second quarter have risen rapidly over the course of this year. All Nvidia will have to do to beat this target: outrun 95% annual earnings growth to more than $51.5 billion. Analysts project the chip maker will report record sales of $92 billion for the period, up from a forecast of $78 billion at the start of this year.

In July, big-tech earnings sparked volatility. Concerns about runaway capital spending spread across the sector after Alphabet’s and Tesla’s results, driving a $890 billion wipeout that contributed to the unwind of hedge fund Situational Awareness. Microsoft posted the largest one-day gain in market capitalization by any company, ever, after a quarter proving that it could still show investors the money. SpaceX rocketed higher after a record-breaking initial public offering, only to see $1 trillion in value evaporate.

Surging memory prices and borrowing costs have fueled fears that those and other companies will be unable to keep plowing more money into supplies including Nvidia chips. Shaia Hosseinzadeh, founder of OnyxPoint Global Management, has recently bought dips in AI-infrastructure stocks when Wall Street has strained to absorb massive debt issued by Silicon Valley.

“The macro data is really quite robust,” he said. “Of course, there’s a level at which everything breaks.”

Investors have kept pumping money into the AI trade despite concerns around chip consumers—and to the benefit of chip producers. That is why Nvidia’s outlook for semiconductor demand could send ripples through counterparts such as Micron Technology and Sandisk, developers of the data centers in which their chips reside, and a supply chain of power producers, contractors and other specialists that underpin the globe-spanning AI build-out.

“We joke internally that we’re all Nvidia analysts now,” said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.

The irony is that investors have tended to sell Nvidia stock immediately after blockbuster earnings, with shares falling each trading session after its four past quarterly reports. Some are betting that will be the case this time around, too.

The options market is pricing in a 5.3% swing, higher or lower, in Nvidia shares during the session following earnings, according to Option Research & Technology Services. That is higher than the 4.8% average move in Nvidia’s stock over the last 12 months after the company reports quarterly results.

In recent days, some of the most actively traded Nvidia options have been put contracts tied to the stock falling from its Friday value of $214.75 to $205 and $210 apiece, according to Cboe Global Markets data. Put options give the right to sell a stock by a set price and typically represent a bearish wager.

Many analysts remain optimistic. Frank Lee, global head of tech hardware and semiconductor research at HSBC Global Investment Research, recently raised his price target for Nvidia shares to $360 from $325, citing, among other things, Nvidia’s strategic partnerships with suppliers and its role as a top contributor to open-source AI.

GameStop Stock Is Tumbling

Because its earnings report mattered after all.

Nvidia’s earnings will test Wall Street’s confidence in the AI boom.