Why GameStop Stock Can Survive the Streaming Revolution
From a technical and fundamental perspective, GameStop (NYSE:GME) stock looks terrible, and that’s putting it lightly. In 2019, GameStop stock has dropped 6.5%. But that somewhat modest decline doesn’t really tell the whole story.
Soon after the new year dawned, anticipation that the embattled video-game retailer would be acquired sent GameStop stock soaring. By Jan. 28, GME stock had delivered over 24% of quick and easy profits to speculators. However, core realities came to the forefront, dooming those who didn’t sell GameStop stock quickly enough.
Despite strong overtures, management failed to find any interested buyers, and in fairness, it was a big ask. Over the last few years, the company’s revenue growth first flattened, then declined. While GameStop offered consumers multiple options at very attractive prices, technology reared its ugly head.
Video-game streaming and subscription services offered the same services as GME, but with the convenience of in-home purchases. Worse yet, the retailer, which sells Sony (NYSE:SNE) hardware and software, began to view the Japanese company as a rival in the lucrative streaming space.
When management finally announced that it’s no longer trying to sell the company, it was game over. GME stock crumbled on the news. A little more than a month after the disclosure, sentiment towards GameStop stock remains low.
Naturally, high-profile failures Blockbuster or Sears (OTCMKTS:SHLDQ) come to mind. The increased use of digitalization upended both retailers’ core revenue channels. Furthermore, an inability to adjust quickly and effectively compounded the crisis.
Blockbuster particularly provides a blueprint for GME’s potential impending disaster. With the arrival of streaming companies Netflix (NASDAQ:NFLX), consumers had no need for the brick-and-mortar entertainment shops that Blockbuster provided. The bears contend that GameStop stock will be another victim of digitalization.
However, the situation is not that simple.
GameStop Stock Is Complex
I’ve encountered the arguments about the similarities between GME and Blockbuster for years as GME stock began to tumble. I’m not sure if others have cited parallels between Blockbuster and Sears. Either way, I don’t these or other analogies because they don’t quite fit GameStop’s outlook.
Let’s be clear about these cautionary tales. In pretty much all these cases, digitalization utterly replaced physical stores. In the case of Blockbuster, Netflix provided a quicker, more convenient way to obtain the exact same product. Unless you really wanted to get in your car late at night and go to a store where you could encounter homeless people, streaming movies was a better option.
Although it might appear that streaming services are also replacing brick-and-mortar video-game stores, that’s actually not the case. In fact, I’m going to say something shocking: it’s impossible for content streamers to replace GME.
Before you bombard me with nasty e-mails, let’s look at this logically.
Modern gaming consoles Sony PlayStation or Microsoft (NASDAQ:MSFT) Xbox feature almost life graphics with superb frame rates.
To duplicate this enormous data transfer wirelessly is an extremely tall order. That’s why I’m not that impressed with Amazon’s (NASDAQ:AMZN) foray into video-game streaming.
Even if streaming technology evolves to the point where it could handle today’s games, guess what? The console-makers themselves will improve their craft. It’s simple science: with consoles, you can utilize insane amounts of data with none of streaming’s performance-lag issues.
And because no one is replacing consoles, I can’t jump on the “sell GameStop stock” bandwagon. However, bears might contend that game developers could sell their games directly to the consumer via downloads. But GME can counter with its low-cost, used-games business model.
After all, you can’t download a used game.
GameStop Stock Is Worth a Gamble, But Not Much Else
So does that mean you should buy GameStop stock? Unfortunately, I can’t decisively recommend that move. While I believe that GameStop remains relevant in the streaming era, that doesn’t mean that GME stock will become profitable.
No matter how you look at it, GME stock is a choppy mess. Investors previously forgave its poor financials because of a possible acquisition in the near-term. With that gone, investors’ emotions will weigh heavily on GME stock. That’s not a good place to be.
However, buying GameStop stock speculation isn’t a bad idea. I’ve visited several GameStop stores recently, and they are always abuzz. Of course, you shouldn’t place too much emphasis on my anecdotes. However, I also visited Sears’ stores before its meltdown, and it was shopping at a morgue.
GameStop just doesn’t carry the vibe of an organization facing a crisis. Part of the reason why is because deep down, management knows it still has much to offer.
As of this writing, Josh Enomoto is long SNE.
What The GameStop Rollercoaster Could Mean For Retail
A closed GameStop shop seen in Stephen's Green Shopping Centre in Dublin. In January 2021, a short … [+] squeeze caused GameStop stock to surge 1,500 percent in two weeks, hitting a record of 483 USD on January 28 (New York Stock Exchange). On Friday, 29 January, 2021, in Dublin, Ireland. (Photo by Artur Widak/NurPhoto via Getty Images)
NurPhoto via Getty Images
There has long been an argument about whether hedge funds, and private equity in general, help or hurt retail. Those on the help side argue that the sector serves a purpose, literally much the vultures in nature’s great circle of life. They may be bottom-feeders, but by cleaning out the dead retailers still walking, they keep the whole of retail healthier.
Others are not so optimistic about those contributions, arguing that private equity is not taking out the already-dead, but rather destroying value that could be preserved and grown – and for the benefit of many more people – in favor of lining the pockets of a few who have learned how to exploit tax and regulatory loopholes for their profit. In 2019, 70% of retail bankruptcies were from private equity-owned companies.
The reality is probably somewhere in between. Retail RVI ers got themselves in trouble by being too slow to react to consumer behavior shifts as digital became a larger part of their lives. And PE firms figured out how to crack open a piggy bank that could be raided through a financial perfect storm that easily drives weak retailers business.
GameStop changes the game. While there are plenty of arguments raging over the David vs. Goliath happening between retail investors and the hedge funds who shorted the stock, there’s also still the company itself.
Can GameStop take advantage of the surging price? Some say maybe yes, though it comes at the downside of basically bailing out the hedge funds, which would leave the activist retail investors holding the bag. They could also run afoul of some regulations depending on how it’s done.
GameStop itself has put some limits on stock sales by executives, trying to navigate between this rock and a hard place.
An End to Retail’s PE Parasite?
GameStop became a thing because retail investors spotted that hedge funds had gone so far in on shorting the stock that there were more shorts than there were actual stocks.
But GameStop was also just the front-runner in the next round of retailers that could easily be taken out by short sellers looking to suck a dying company dry.
And after the length of the pandemic, there are plenty of retailers that are vulnerable to the same approach.
But this approach may now be cut off, as many more investors will be keeping an eye out for other opportunities to squeeze short sellers that, whether legal or not, are effectively naked short selling.
So one potential impact is that it might actually be worth trying to resurrect a retailer on the brink, rather than let PE take them out.
It’ll depend on whether GameStop can navigate its way through the mania to an end result that puts more capital in the bank, and whether Congress decides to do something more definitive to prevent this situation from arising again.
But all things being equal, if GameStop reduces the incentive for hedge funds to pile on weak retailers, then the future of a lot of other struggling retailers becomes a little less precarious.
Can GameStop Be Saved?
Let’s assume that GameStop is able to literally capitalize on this pitched financial battle. Is it even worth it to try to save the company?
Chewy.com founder Ryan Cohen bought into GameStop right before the stock took off, securing three board seats and a promise of a strategic review of the future of the company. He hasn’t been too forward with his plans for GameStop, other than bringing his Chewy.com team’s model of customer focus and technology together for the brand.
But GameStop is in a much different position than other retailers in this position in the past because the pandemic is still happening, and stores are still highly constrained in the capacity they can manage. All stores everywhere are in the same boat.
For once, GameStop is basically facing a level playing field.
At the current rate of vaccinations, GameStop has at least another six months’ grace before stores really need to reopen at scale, and probably simply aiming for the 2021 holiday season is good enough.
That leaves the company with a once-in-a-lifetime opportunity to make a step-level change in what it does and how it does it. If the company can do that, then it paves a path for way too many retailers facing the exact same future. But it has to be an extremely bold move – not the incremental store changes at an incremental pace that GameStop has tried in the past.
Go Big Or Go Home
GameStop is a physical media retailer in a sector that has long been going digital.
Games took longer than even movies to be disrupted in part because of file size and the home bandwidth required for downloading, and in part because gamers have kept discs around in order to be able to capture at least some resale value from games they’re done playing. But those constraints are rapidly falling to the wayside.
Just as GameStop is facing a disruption that took out so many retailers before it, it also has an opportunity to do so much more than incremental changes to get the hole it’s in.
Its products and its expertise are commodities now – you can get them anywhere, and you can get them very easily online.
Cohen is making the argument that he can help GameStop out-Amazon AMZN Amazon by being customer-obsessed, Chewy.com. I disagree on both those points.
Chewy.com has been great at serving “pet parents” but their value has not been in letting people obsess over their pets (and I speak here as a loyal Chewy customer), it’s been in taking the hassle making sure that your pet’s food never runs out.
Even when the timing isn’t great and you have to constantly tweak the frequency of delivery (which I have to do all the time), it’s still mostly set it and forget it.
The company’s business model solves an important pain point for consumers, but if Chewy opened a store down the street from me, I would hope to never have to go there, because it would mean that something in my online order got messed up.
GameStop needs stores—it will be the company’s only differentiator in a world that is rapidly moving online. Traffic is the most important thing that stores need. And for driving traffic, what they sell is far less important than the experiences they enable.
The retailer has made some half-hearted attempts to revamp their stores in that direction, encouraging shoppers to hang out and play games, but it’s not enough.
Prior to the pandemic, movie theaters were upping their game to deliver very high-end theater experiences – the kind you couldn’t get except in the most expensive home theater setup.
GameStop needs to become a game playing venue, a place to try out the craziest TV sizes, the next-generation of VR on an omni-directional treadmill, the wildest sound systems.
They need to implement a hub-and-spoke store strategy with a flagship store in every major city that can host a serious e-sports competition, complete with production values and a studio audience. And then they need to hook in their smaller outlying stores in as satellite participants.
Every neighborhood kid can try their hand and bring their friends to cheer them on. Gen Z loves in-person experiences and after the year they’ve had, they’re going to want them even more.
If GameStop can “survive” on being a venue, then they will have secured the traffic they need to actually sell stuff, moving them from survive to thrive. Love that gaming chair? We can have it delivered to your house this afternoon. Love that controller? Let me add it to your tab. Want to see what the next Uncharted game looks on a 100” screen? Come on in and check it out.
The Bottom Line
GameStop is a unicorn, just not in the way that everyone has meant it lately. It is a one-time, unique creature in this moment that we will ly never see again.
But it could have lasting impact for retail—giving precarious companies the breather they need to figure out how to pivot from the last node in the distribution of consumer goods to a brand company that solves consumers’ problems and/or provides them with memorable experiences. They could become a leader in showing these precarious retailers how to pivot.
I don’t have high hopes that GameStop will make the bold moves needed. But in the battle between retail investors and hedge funds, I’m rooting for GameStop.