GameStop (GME) stock is pushing higher on Monday after the gaming merchandise retailer posted better-than-expected preliminary results for its fiscal Q2. The firm’s net income soared a whopping 72% year-on-year, driven largely by unrealized gains on its massive holding of eBay (EBAY) common stock.
Despite today’s gains, GameStop shares are down nearly 9% versus the start of this year.
How eBay Drove GameStop Stock Higher
During its second quarter, GameStop converted derivative positions into a direct equity investment of 43.4 million eBay shares.
The fair value of this holding rose to about $4.95 billion by early August, providing a massive non-operational windfall that drove the retailer’s net profits up to $310 million. This gain helped offset a $75 million loss on digital assets and related receivables.
Investors are cheering GME stock because the eBay benefit equips the firm with immediate balance sheet support, creating an illusion of improving profitability for novice investors.
That said, GameStop broke above its 20-day moving average (MA) on Aug. 31, indicating the bullish momentum could sustain in the near term.
Should You Load Up on GME Shares Today?
Disciplined investors are still advised to exercise caution in playing GameStop shares as the company’s “on paper” net profit gains mask a financial reality.
The earnings boost came largely from investment gains, not sales growth in its core retail business.
In fact, in the preliminary release, management confirmed that revenue is expected to decline on a year-over-year basis to between $780 million and $800 million in Q2.
Moreover, the eBay stake drained GME’s cash, cash equivalents, and marketable securities down to about $5.06 billion from $8.69 billion a year ago, dampening the stock’s near-term appeal even further.
In short, without a clear operational turnaround in the core gaming merchandise sales, paper gains on eBay shares likely offer a temporary cosmetic lift rather than a sustainable investment thesis.
GameStop Doesn’t Receive Wall Street Coverage
Another major red flag for GME shares is the absence of Wall Street coverage.
Without analysts’ estimates, investors are left flying blind in terms of prospects, forward guidance, and target valuations.
On the date of publication, Wajeeh Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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