GameStop Stock Is Showing Signs of Weakness as Short-Sellers Lose Interest

It is time for Redditors to rejoice. After battling it out with hedge funds for the better part of a year, we are finally at a point where most short sellers are skeptical of touching GameStop (NYSE:GME) stock.

The short interest percentage of the total float stands at 16.98%, as of Aug 30 versus a peak of 141% in the first week of 2021, according to financial technology and data firm S3 Partners.

After losing billions of dollars in this fight with retail investors, it looks like the bears are finally throwing in the towel.

The short interest is one of the main reasons why Redditors liked GME stock in the first place. They saw this as an excellent opportunity to teach Wall Street a lesson. Despite the gaming industry racking up double-digit growth, GME has struggled for several years now.

Many felt the situation would mirror that of Blockbuster. It was once the king of the video rental industry but was quickly relegated to the background after Netflix (NASDAQ:NFLX) emerged on the scene.

Now it exists as a cautionary tale. Considering these circumstances, it was natural that analysts were predicting if the embattled video game retailer would file for bankruptcy.

However, we all know what happened next. Redditors came to the rescue, and the company now has the financial resources to restructure and have another go.

With that being said, the next question on everyone’s mind is when the penny will drop. There is a substantial disparity between the stock price and fundamentals. It is just a matter of time before they reconcile.

Sobering Quarterly Results

The only way GameStop can hold onto its gains is through delivering excellent quarterly results. Unfortunately, that doesn’t seem to be happening.

In the second quarter ended July 31, 2021, GameStop delivered a lackluster report much as it had in the first quarter.

Revenue came in at $1.183 billion, a 25.3% year-on-year increase over the year-ago figure of $942 million. Although it’s an increase, you have to put the numbers into context.

Last year, a majority of GameStop stores were shuttered during the pandemic. It was an unusual year, so if we compare it to pre-pandemic numbers, the revenue numbers fall 8% below the $1.29 billion produced in the fiscal Q2 2019. Meanwhile, GameStop reported an adjusted loss per share of $0.76, which missed analyst estimates by $0.09.

The real worry coming out of this earnings season is soft software sales. They fell to $397 million in the quarter from $558 million during the same period last year.

Although people still purchase physical copies of games, digital copies are more popular. These purchases cut out the middle man and remove the problem of customers receiving damaged discs.

GameStop can take heart from hardware sales, which finished at $610 million this past quarter. However, the major problem the company will have moving forward is increasing the scope of digital sales.

The other thing worth noting is that the launch of new gaming consoles from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) lead to a hyper sales cycle. This time around, the shortage of semiconductor chips hampered the process. But eventually, the sales will stabilize, meaning digital sales are key for the company’s long-term future.

Turnaround Strategy

Ryan Cohen and his leadership are one of the main reasons a certain set of investors remains optimistic regarding the chances of GME mounting a comeback.

I profiled him extensively in my previous articles about the video game retailer, and I continue to believe that the team he has assembled will be the driving force for the company moving forward.

However, at the moment, we do not have a long list of announcements regarding the strategy. In recent weeks, the only major news we have had is the company opening a customer care center in Pembroke Pines, Florida. GameStop is hiring 500 call center employees for that endeavor.

The major issue, nonetheless, is digital sales. Certain developments should give you some heart. For example, its partnership with Microsoft is generating immense interest.

Once the semiconductor crisis clears up, GME could see more digital sales courtesy of the Xbox Series X and Xbox Series S. Monetization of GameStop.com is also something the management can focus on, considering the video game retailer is looking to move away from its traditional brick and motor company aggressively.

Time Could Be Running Out for GME Stock

On innumerable occasions this year, analysts predicted doomsday for GME stock. But each time these analysts have had to eat humble pie, yours truly included. Considering the year, we have had and GME’s status as an iconic meme stock, it might seem like the eventual drop will never happen.

However, with the short interest evaporating, the time is right to part with your investment. All the parties involved have gotten what they wanted.

GME has $1.7 billion of net cash on its balance sheet, which is plenty of cash to finance its turnaround. Redditors have made their money and one-upped the hedge funds.

Now, the inevitable grind will start for GameStop to transform itself, which will take a substantial amount of time.

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

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.