Video game retailer GameStop (GME) has seen bullish momentum this year, as can be seen in the chart below. And the company is scheduled to report its third-quarter results on December 10. While the stock has often been traded as a “meme stock,” the hype has allowed the company to raise billions through stock sales, leaving it cash-rich despite continued sales declines. I believe GameStop has a chance to report a profitable quarter and maintain its current momentum. Therefore, I am cautiously optimistic that GME stock will deliver gains.

Maintain the momentum

The video game retailer’s brighter outlook ahead of earnings can be attributed to the upward momentum that has occurred since the return of famous social media influencer Keith Gill, aka “Roaring Kitty.” GME stock is up more than 60% this year, significantly outperforming the S&P 500 (SPY). Gill was instrumental in introducing the GameStop investment thesis to hundreds of thousands of retail investors in 2020, which ultimately led to the massive short squeezes of 2021.

This spring, Gill returned to social media after a nearly three-year absence and announced a multi-million dollar bet on GME stocks. His involvement helped the stock skyrocket to triple digits within just a few weeks. GameStop management seized the opportunity to capitalize on the hype created by Roaring Kitty’s return.

In May, the company sold 45 million shares, raising $933 million in cash. After another rally a few weeks later, GameStop sold another 75 million shares in June, raising $2.10 billion. With these new funds, combined with the company’s previous cash reserves, GameStop now has approximately $4.2 billion in cash, equivalents and short-term investments.

Strong momentum in GME stock

To understand the bullish momentum that GameStop is currently experiencing, we can look at both short- and long-term technical indicators that are showing strong bullish signals. First, GameStop shares are trading above their 20- to 200-day simple moving averages (SMA), suggesting that both short- and long-term trends remain bullish. This indicates strong buying momentum and the potential for further growth.

However, it is worth noting that the rally triggered by Roaring Kitty’s return may have distorted the average share price over the last 200 days. However, if we examine the exponential moving averages (EMA), which are more sensitive to price fluctuations, we see the same uptrend over the 20-200 day time frames.

What to expect from GameStop’s Q3 results

While GME stock trended higher ahead of fiscal third-quarter earnings, it is still highly uncertain how the stock will perform this quarter. Historically, GameStop’s stock price has performed regardless of business fundamentals.

Since GameStop became a “meme stock” in 2021, many analysts have abandoned coverage of the company. Therefore, the consensus on the sales and profit figures for the third quarter of the fiscal year comes from only two analysts. The numbers to beat are loss per share of -$0.03 and revenue of $887.68 million, which would represent a year-over-year decline in sales of 17%. Those are pretty low bars for GameStop to jump.

Given that GameStop’s management strategy lacks detailed execution, namely (1) establishing excellence in omnichannel retail, (2) achieving profitability, and (3) leveraging brand equity for growth, it is clear that the company is prepared for a decline in sales. Therefore, the main focus is on achieving balanced profitability, which can only be achieved through continuous improvement of the cost structure. Regardless of whether the year-over-year revenue decline is greater or less than the expected 17%, GameStop can reduce its cost of goods sold more than the revenue decline and reduce operating expenses more than in past quarters, it could be a decent quarter. In this scenario, GameStop could be on track to post a profitable year for the second year in a row.

Is GameStop a good buy?

There’s only one analyst currently covering GME stock on TipRanks: Wedbush’s Michael Pachter. Pachter gave the stock a Sell rating and set a price target of $10, compared to his previous estimate of $11, which he revised on November 9th of this year.

Pachter suggests that the best course of action for GameStop would be to close all branches and move to an online model that operates more like a bank. He argues that the company lacks a clear strategy from management to offset the impact of store closures that have continued in recent quarters.

Diploma

While GameStop remains more of a speculative venture than a traditional investment, I believe there’s a good chance the company will report a profitable quarter, even if revenue falls nearly 20% compared to the same period last year. Therefore, I expect the upward momentum to continue and I take a contrarian, bullish stance. The management team has suggested that achieving breakeven profitability is enough for now. With around $4.2 billion in cash and no significant debt, I think it’s only a matter of time before GameStop announces significant growth plans beyond its core business. If such an announcement were made in the third quarter of the fiscal year, it could serve as an important catalyst for further increases in the share price.

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