GameStop Corp. soared as much as 53 per cent, heading for its biggest gain in two years, after reporting a surprise profit in the fourth quarter and beating analysts’ estimates for revenue. 

Net income was US$48.2 million, the first profit in two years, and compared with a loss of $147.5 million a year earlier, the Grapevine, Texas-based video game retailer said in a statement Tuesday. Net sales totaled $2.23 billion in the three months ended Jan. 28, beating analysts’ projections of $2.18 billion. 

“GameStop is a much healthier business today than it was in the start of 2021,” Chief Executive Officer Matt Furlong said on a call with analysts. “We have a path to full-year profitability.” The company didn’t offer an outlook for 2023.

Shares surged to as high as $27 as trading opened in New York on Wednesday. Very few analysts currently cover the so-called meme stock, which has fluctuated wildly over the past two years.

GameStop, known for its consumer electronics and gaming merchandise, has struggled with profitability as the games industry has moved away from physical discs to online downloads. The industry has been further hamstrung by supply chain constraints on consoles and a relatively light schedule of new game releases last year. US video game sales dropped 5 per cent in 2022, according to industry researcher NPD Group. 

The video game industry could be poised for a rebound this year with pent-up demand for games after many anticipated titles were delayed in 2022. This year’s lineup includes Activision Blizzard Inc.’s continuation of Call of Duty: Modern Warfare II and Diablo 4 and Electronic Arts Inc. will release its next highly anticipated Star Wars game in April. 

One bright spot in the quarterly results was GameStop’s business selling physical collectibles, an area the company has identified as a long-term priority. Sales in that category rose 12 per cent to $313.2 million. Sales in the hardware and accessories category rose 4.6 per cent to $1.24 billion but software sales fell 15 per cent to $670.4 million.

Activist investor Ryan Cohen joined GameStop’s board and became its chairman in 2021, embarking on a reorganization that included ousting the chief financial officer and company-wide layoffs. The quarterly results showed that cost-saving efforts have begun to pay off.

Wedbush analyst Michael Pachter said GameStop managed expenses “exceedingly well,” but that “longer term, the company cannot save its way to prosperity as new-gen hardware sales inevitably cool off and physical sales of video games continue on their multi-year downward trajectory, with that negative momentum buoyed by the growing appeal of mobile and subscription offerings for gamer hours and dollars.” 

Supply chain delays during the pandemic left GameStop with a backlog of inventory that had accrued during previously high demand of the early Covid era. The company reduced inventory to $682.9 million at year end, down from $915 million from a year earlier.

A push into digital assets — the company announced a partnership with now-bankrupt cryptocurrency exchange FTX US last fall, only to cancel it two months later — has so far produced mixed results.

Retail traders turned GameStop into a meme stock during the pandemic, wildly pumping up its share price based on social media chatter unrelated to the company’s fundamentals.