One of the stocks to have made a strong move in recent times is that of video game retailer GameStop (NYSE:GME). The company seemed to be on the verge of collapse during the coronavirus pandemic but it has rallied strongly in recent times. The GameStop stock went soared to $10 a share towards the end of last month from the lows of $2.57 a share. However, it is important to figure out the reasons behind the rally.
One of the major reasons behind the recent rally in the GameStop stock came about after the company announced a partnership with tech giant Microsoft. It led to a massive rally in the stock and by the middle of October; the stock had gained as much as 100% in 2020.
That being said, it is also necessary to point out that the partnership in question is merely related to the use of certain Microsoft products by GameStop.
It is not entirely clear why such a deal led to such a strong rally in the GameStop stock. However, at the same time, it is also important to point out that the stock had recorded gains in the week prior to the announcement of the Microsoft deal as well. It simply did not seem congruent with the company’s prospects and fundamentals.
Business in Bad Shape
GameStop has been reporting progressively poor earnings for quite some time now and it seems there are several factors that have affected its business adversely.
Microsoft and Sony did not release their new consoles in time and many new releases were held back as well. That hurt GameStop’s business considerably. In addition to that, there has been a fundamental shift in consumer behavior.
Gamers are now increasingly opting for direct downloads of games instead of going to the retailer and that is another major factor behind the collapse of GameStop’s business. In 2019, the net income of the company collapsed by as much as 91% year on year to only $19.1 million.
Future is Dark
The company has been in free fall for quite some time, however, the coronavirus pandemic seems to have made the process much faster. It has created a situation in which the gamin retailer is probably going to break even or eke out small profits in boom years.
On the other hand, in bad years, GameStop will probably make massive losses. The company boasts of a decent cash pile and hence, bankruptcy is not an imminent possibility. However, it is unclear how the company is going to stage a turnaround.
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