GameStop stock price plummets after weak second-quarter results

• GameStop shares fell on Wednesday after the company announced a 31 percent decline in second-quarter revenue.
• The decline in video game retailer revenues came as the industry shifted to digital game downloads.
• GameStop’s small gain was driven by interest income, which could decline as interest rates fall.

GameStop investors got a troubling warning sign on Wednesday after shares of the video game retailer fell 18%.

The decline came after the struggling retailer reported its second-quarter results after the market closed on Tuesday, and also after another round of share dilution.

GameStop’s revenue fell sharply 31% to $798 million, as the video game industry accelerated its shift from physical game sales to digital game downloads.

This ongoing shift likely fueled GameStop’s recent shift to selling retro video games for consoles like the Nintendo 64 and Sega Genesis, as digital sales have failed to replace them.

In addition to the sharp revenue decline, GameStop reported a minor surprise in terms of earnings growth, with adjusted earnings per share coming in at $0.01 ahead of Wall Street estimates of -$0.09.

The only problem is that GameStop’s profits came from interest earned on its $4.2 billion in cash, not from its core retail business.

GameStop reported $22 million in operating losses for the quarter, which are directly related to its retail business. On the other hand, the company reported $39.5 million in net interest income.

But that elevated interest income can’t last forever, with the Federal Reserve set to deliver its first rate cut since 2019 next week. A significant drop in interest rates over the next year could push GameStop back into negative yield territory.

GameStop addressed the issue in its 10-Q report filed with the SEC on Tuesday.

In it, the company said its profitable quarter was “primarily attributable to interest income increasing as a result of higher returns on invested cash, cash equivalents and marketable securities, as well as returns on cash received from the issuance and sale of shares of our common stock in the ATM Offering.”

The ATM offering follows the recent sale of GameStop shares, which was completed after Keith Gill of RoaringKitty fame returned to social media in May and generated a lot of enthusiasm for GameStop shares, sending the stock on another rollercoaster reminiscent of the meme stock boom of 2021.

However, the excitement quickly subsided and GameStop now needs to develop its strategy.

Part of its path forward is raising even more cash from investors. The company revealed Tuesday that it had filed for an offering of up to 20 million shares, putting further pressure on the stock price.

Investors are still waiting for GameStop CEO Ryan Cohen’s turnaround plan to come to fruition, and some of them apparently support it.

“I believe in Ryan Cohen’s GameStop. Adding more…” one Reddit user wrote on Wednesday, along with a screenshot of an unfilled limit buy order for 100,000 shares of the company.