GameStop craters as earnings show sales falling and profits driven mostly by its huge cash pile

• GameStop stock plunged on Wednesday after revealing a 31% revenue decline in its second-quarter earnings.
• The video game retailer's revenue drop comes amid the industry's shift to digital game downloads.
• GameStop's slight profit was driven by interest income, which may decline going forward with rates set to fall.

GameStop investors received a sobering wakeup call on Wednesday after the video game retailer saw its stock plunge as much as 18%.

The decline came after the struggling retailer announced its second-quarter earnings results after the market close on Tuesday, along with another round of share dilution.

GameStop's earnings revealed a sharp 31% revenue decline to $798 million as the video game industry accelerates its transition from physical game sales to digital game downloads.

This ongoing shift likely sparked GameStop's recent pivot to selling retro video games for nostalgic consoles like the Nintendo 64 and Sega Genesis, as digital sales cannot replace them.

Aside from the sharp revenue decline, GameStop reported a slight profit surprise with adjusted earnings per share of $0.01 higher than the -$0.09 estimate from Wall Street.

The only problem is that GameStop's profits were driven by the interest earned on its $4.2 billion pile of cash rather than its underlying retail business.

GameStop reported $22 million in operating losses during the quarter, which are directly related to its retail business. On the other hand, the company reported $39.5 million in net interest income.

But that elevated interest income can't last forever, with the Federal Reserve set to make its first interest rate cut since 2019 next week. A significant decline in interest rates over the next year could plunge GameStop back into negative profit territory.

GameStop addressed this dynamic in its 10-Q report filed with the SEC on Tuesday.

In it, the company said its profitable quarter was "primarily attributable to interest income increasing as a result of higher returns on invested cash, cash equivalents, and marketable securities, as well as return on cash received from the issuance and sale of shares of our common stock from the ATM Offering."

The ATM offering references GameStop's recent share sales, which it was able to complete after Keith Gill of RoaringKitty fame returned to social media in May and generated a lot of enthusiasm for GameStop stock, sending shares on another roller coaster ride reminiscent of the meme-stock boom in 2021.

But the hype quickly died down, and now GameStop needs to chart its strategy.

Part of its path forward is raising even more cash from investors. The company disclosed on Tuesday that it had filed for an offering of up to 20 million shares, putting further pressure on the stock price.

Investors are still waiting for GameStop CEO Ryan Cohen's turnaround plan to take hold, and some of them appear to be sticking with him.

"I believe in Ryan Cohen's GameStop. Adding more…" one Reddit user posted on Wednesday, along with a screenshot of an unfilled limit buy order for 100,000 shares of the company.