Microsoft's Game Pass is bad news for GameStop investors

GameStop (GME) shares are sliding further as this past week's reinvigorated meme stock trade begins to wane and the retailer files to sell 45 million shares of its additional stock.

Wedbush Equity Research Managing Director Michael Pachter comes on Catalysts to talk about GameStop's future — expecting further declines in the stock despite any messaging from X (formerly Twitter) user Roaring Kitty — and what Microsoft's (MSFT) Game Pass service could mean for the video game retailer.

"The big news today, which is a Wall Street Journal exclusive speculation that Call of Duty will be on Game Pass," Pachter tells Yahoo Finance. "I can confidently tell you that anybody who's a Game Pass subscriber would be an idiot to buy Call of Duty. they won't. So Call of Duty sales will be lower this year, it wasn't on Game Pass last year."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Luke Carberry Mogan.

Video Transcript

Another side that we're watching today is Game Stock.

We've got shares of the meme stock here falling this morning at losses of 23% of prelim results here showing a drop in first quarter sales.

They also issuing here a plan to sell shares.

And that's really what is moving stock here in early trading.

We want to talk about all of this and what is next for gamestop and the trade a large for that we want to bring.

In fact, he's what bus equity research and managing director Michael.

It's great to see you before we get into it.

Just first, your quick reaction to the news that we're getting out on game stop this morning.

Well, I think they're pretty smart.

Um, you, you definitely have to give them credit for capitalizing on the opportunity to build their war chest.

Um I'm not seeing anything in the preannouncement that tells me that the business is turning around.

Uh, but at least they'll raise enough cash to last another three or four years if they, uh if they in fact continue to flail and try to find a new strategy.

So I admire that they're taking advantage of the opportunity.

That's, that's probably in the best interest of their longer term shareholders.

I feel sorry for the fools who buy the stock at 21 because it's worth single digits and I'll have a note out shortly.

My, my targets under review.

Ok.

But still Michael, I mean, we saw roaring kitty getting back on X and then not causing a little bit of this rally.

I know it wasn't the only cause, but could there be another random catalyst that leads to a game stop rally?

That really isn't about the company fundamentals.

Well, with, with respect to her and Kitty because he was absolutely right in 2020 there was a structural flaw in the holdings of gamestop.

I mean, they had more than 100% of the share short and he made that obs observation, it was astute, he rallied uh retail investors, redditors, you know, reddit Raiders to, to buy into the stock.

And he was right and they made, they made a movie about it and he was right.

Um Now he's not actually doing anything other than posting video clips and you know, I I he was dormant for two or three years.

He just started a frenzy of post, but they're all video clips.

Only one had any reference to gamestop.

It was a woman with a Gamestop logo on her dress.

Um I don't know what he's saying.

So sure, you know, guys posting movie clips saying it's over.

What's that mean?

Um If you want to buy a stock based on that, God bless you, but he has not actually said go buy games stock, right?

So Mike, what do you think?

The next several months, several quarters look like here then for gamestop, they're gonna see continued declines.

Uh There's nothing big coming out this year.

You know, we don't have anything incremental this year.

Next year, you have Grand Theft Auto but nothing big.

No new consoles this year.

Uh The console makers are all kind of guiding to lower expectations.

Sony's looking to sell 18 million consoles.

They were looking to sell 25 million before.

Um the, the, the big news today, which is a Wall Street Journal exclusive speculation that call it duty will be on game pass.

Um I can confidently tell you that anybody who's a game pass, subscriber would be an idiot to buy Call of Duty.

They won't.

So Call of Duty sales will be lower this year.

It wasn't on game pass last year.

And that means physical sales at gamestop will be lower because of that.

So lots of uh of head wins for them and I don't see any way out of it.

The preliminary results were actually worse than we had modeled.

They did under 900 million revenue and we had modeled a billion that's down 25% year over year.

Now, that's not all industry decline.

Some of that is store closures and we don't have the detail yet, but realistically, they cannot save their way to prosperity.

Their store unit economics can't get any better.

You have to have an employee in the store.

You can't leave it at self serve or people will steal everything and you can't not pay rent or not turn the lights on.

So they're, they're done shrinking their cost structure.

The only question is, can they, you know, shrink their store count and re return to profitability?

I don't think so.

They lost money last year.

You know, they made 17 million in income with 45 million of interest income.

So they lost on an operating basis by over 30 million.