GameStop Earnings Preview: GME upends Wednesday results with layoffs

• GameStop has been quietly announcing layoffs this week.
• GME stock tanked 8.5% on Tuesday one day ahead of Q3 results.
• Wall Street expects $-0.28 in adjusted EPS on revenue of $1.35 billion.
• NASDAQ down 1.1% due to strong US Dollar in Wednesday premarket.

GameStop (GME), the embattled videogame retailer with the heavily shorted stock, surprised the market on Tuesday with what appears to be a large round of layoffs. Interestingly, GameStop has not independently confirmed the extent of the layoffs, and all news outlets reporting on the event are simply reading the tea leaves from a dozen or so announcements from employees on the LinkedIn social network. The news is fascinating since GameStop is scheduled to deliver third quarter earnings results after the market close on Wednesday. Could these layoffs be related?

GameStop stock is trading up 0.5% in Wednesday's premarket, while the NASDAQ is down 1.1% as a stronger US Dollar makes equities less attractive. AMC stock also dropped 9.4% on Tuesday.

GameStop stock news: Layoffs may signal poor Q3 quarter

GME stock steadily sold off as news of the layoffs trickled from LinkedIn to headlines on Tuesday, and shares ended the day down 8.5% at $23.39 – its lowest price in about one month. At least one laid off GameStop programmer wrote on LinkedIn that it was "another big round of layoffs". Anecdotal evidence suggests that the team developing and operating GameStop's crypto wallet were let go and that members of HR and other professional segments like transportation were dismissed. Since management has thus far been close-lipped about the affair, plenty of analyst questions will revolve about the extent of layoffs so close to the earnings announcement.
 

Source: LinkedIn

It is important to note that when layoffs arrived over the summer for GameStop employees, various levels of management said they were part of a push toward profitability. Those initial layoffs included letting go of Chief Financial Officer Mike Recupero.

“Our focus is on achieving sustained profitability," said CEO Matt Furlong at the time. "This means eliminating excess costs and operating with an intense owner’s mentality.”

Wall Street expects GameStop to report $-0.28 in adjusted earnings per share on sales of $1.35 billion for the third quarter. Though GameStop is thought to be still experiencing losses, that adjusted EPS figure would mean an 80% reduction in per share losses from a year ago. The revenue forecast would see revenue growing just 4% YoY however. 

It would make complete sense for the layoffs to be connected to poor results on the earnings front then. Management knows that without breaking even in the near future, GME stock could head back to the $1 to $5 range that it experienced for much of 2020.

GameStop stock forecast

GameStop stock has been drifting within a consolidated price range since early September. Now in its fourth month, the GME price range mostly extends between $23 and $29, though the October 31 rally moved well above the trading range to nearly $35. Though GME stock seemed to collapse somewhat on Tuesday, losing 8.5%, it still remained above $23. Longer-term support sits at $22 and $20 from the March and May lows. 

Generally speaking, bulls have had trouble pushing GME stock above the $27 to $28 supply zone. In September they pushed it to $29, but the last few months have seen most rallies peter out between $27 and $28. A roundly positive Q3 could allow GME price action to break out of that resistance zone and move to the recent range high of $35. However, the Accumulation/Distribution line shows that accumulation has been falling slowly but steadily since August. Of course, there is always the chance of another short squeeze. One can only hope.

GME daily chart