The Boring Reaction to Gamestop’s Q2 Earnings Is Actually Good News

Stock Market

If you told me that Gamestop (NYSE:GME) would be flattish after its earnings, I would not have believed you. GME stock rose just 0.2% on Thursday after reporting its second quarter on Sept. 8. After the last two reports, things got a bit too exciting, so I expected fireworks this time. Instead, investors shrugged their shoulders and went on as if it was a normal day. That could eventually be good news. It may mean that GME stock will be able trade on its own merits, not hype.

Retailers walk past a GameStop (GME stock) store in New York City, New York.

Source: Northfoto / Shutterstock.com

GME stock has been the poster child for everything wild on Wall Street this year. It’s been in the hands of Reddit traders and has demolished pros and amateurs alike. Multi-billion dollar companies closed their doors and liquidated their assets after being on the wrong side of the trade.

Therefore, my first assumption today is that I don’t know what I don’t know. 

Investors Should Leave Room for Error

When trading GME stock, I should be humble with my conviction. That aside, management delivered a decent report. Granted, Gamestop missed analyst estimates. But that might have more to do with wrong assumptions rather than bad results.

The actual performance relative to last year was a beat all around. For Q2, the company grew net sales by 26% year-over-year (YOY), from $942 million to $1.18 billion. It also improved profitability levels. I call this progress. Or, at the very least, it’s not a reason to sell GME.

Gamestop was fundamentally in trouble even before Covid-19. In 2019, total revenues declined some 20% from the prior years. Management was against the ropes anyway and it needed to adapt to the changing environment. However, this is still the case, so nothing has really changed over the last three years.

Doing due diligence is difficult when a company is still recovering from a global shutdown. The financial metrics are too wacky to properly gauge. Therefore, we must rely on simple logic and actual GME stock price performance.

GME Stock Is Basing for More Upside Potential

All year, GME stock has been making progress with higher lows. Most recently, the bulls succeeded in holding $147 per share — and they mounted a more than 50% rally from there.

They have given about half of those gains back already. So, I can assume that there is an effort to base around $174 per share. Then the opportunity is to hold the stock for a bullish trade opportunity going back to $225. If the bulls are eventually able to break out, the rally could then even reach $300. Essentially, one target becomes the potential trigger for the next.

I am not a permabull on this stock. I’ve written clearly about Gamestop’s business challenges. But I’ve also traded the price action in front of me. Today, my opinion is that management is in the process of adapting. Meanwhile, the recent price action has been more bullish than bearish. Those two elements combine to make an argument for holding GME. That makes more sense than shorting it. In fact, shorting it is the one thing I would never do.

Investors should either be in GME stock or be waiting to invest. However, this is not an appropriate play for all types of investors. The long-term thesis is viable for those who believe in it. Otherwise, it’s a trading opportunity either happening or in the making.

This is how I tackled Tesla (NASDAQ:TSLA) when it was under duress a few years ago. Even though I didn’t totally believe in its fundamentals, I never shorted it. I was always looking to buy the dips. Gamestop might deliver best with that same approach.

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On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.

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