GameStop Corp. (NYSE:GME) is best known as a specialty video game retailer, and although the gaming industry itself has been gaining momentum in recent years, GME stock has declined steadily.
Like others in the retail space, GME is struggling because the gaming industry is shifting more toward online purchases.
While the company has been working to diversify its revenue streams and find ways to remain relevant, I think comparisons between GameStop and failed video rental company Blockbuster Inc. are valid.
GME stock is heading lower in the short-term and unless the firm is able to pull off some kind of miracle, I think it will struggle in the long-term as well.
GameStop stock has fallen 30% since I last cautioned investors against buying it, and although the firm’s quarterly results have been relatively healthy considering all of the obstacles it’s facing- I stand by my opinion- GME stock is a dud.
1. The Used Gaming Market Will Disappear
One of GameStop’s most popular offerings is the firm’s used game trade-in scheme. The store buys and sells secondhand games, which allows enthusiasts to try a larger range of products without spending as much money.
However, as more and more companies shift toward digitally delivering games, that secondhand market for physical games will dry up.
Instead, many are expecting to see console makers offering their own subscription-based plans that will allow people to try out a range of games without requiring them to pay in-full for each one individually.
Not only would that create a recurring revenue stream, but it would allow them to cut out the middle-man distributors like GameStop.
The problem for GameStop is that the secondhand market and software sales make up the majority of the firm’s sales. Last year new and used games were responsible for around 52% of GME’s sales so a sharp decline would be bad news for GameStop stock.
2. Diversifying Too Late
My colleague Luke Lango pointed to the company’s other bets as reason to stick out the tough times. He’s not wrong. GME does have some promising segments that may be able to withstand the shift toward digital.
GameStop has been making major strides in the mobile industry, and the firm’s Simply Mac business is the largest certified Apple Inc. (NASDAQ:AAPL) reseller. Not only that but GME also does a great deal of hardware sales as well as accessories and collectables.
The trouble is that in order to continue building out its more profitable businesses, GME will have to rely on video game sales, something that looks very unstable right now.
It’s going to take a lot of work for GME to execute its future strategy effectively, especially if video game sales continue to decline. Hardware sales is GameStop’s least profitable segment, so depending on it to prop up a failing business is risky.
As for mobile phone and Mac sales, you almost certainly need bodies in the stores for those divisions to take-off, and right now it looks like GameStop is struggling to do that.
GME has been closing its least profitable stores in order to streamline the business and cut costs, but bottom line profitability has been declining so far this year- suggesting that the firm isn’t able to generate customer traffic in its stores.
3. The Blockbuster Effect
While you might be cheering GameStop’s efforts to step away from physical game sales and build out new aspects of its business, the firm’s latest offering (a subscription-based rental service) looks eerily like something Blockbuster might have tried to do in order to coax the public back into borrowing physical DVDs.
GameStop recently unveiled Power Pass, a game rental service that lets people borrow as many physical games as they want. Interested gamers pay $60 every 6 months and they can check-out games one-at-a-time during that period.
On the positive side, $60 is cheap for gamers who often pay that price just for a single game. If the scheme is successful, it will bring traffic to GameStop locations and give GME a new revenue stream.
But the key word there is if. Do gamers really want to travel in and out of stores to pick up physical games now that companies like Electronic Arts (NASDAQ:EA) offer the same sort of service online?
There’s a chance, like Lango said, that the longer-term looks good for GME stock. However that chance is pretty slim considering the headwinds GameStop is up against. Without a meaningful presence online or an in-store experience that draws in customers, GME looks unlikely to survive.
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