A hot new videogame once meant long lines outside
stores. But today, with nearly every game available for download, the thrill of being an early adopter has gone virtual. That has left GameStop in an awkward spot.
The bricks-and-mortar retailer known for a large collection of games, consoles, and preowned items has struggled in the past year even as game publishers reported major spikes in revenue and user engagement.
GameStop (ticker: GME) sales are forecast to drop 17% in the fiscal year that ends in January, after a 22% drop a year ago. Earnings have declined for four consecutive years, and analysts see them going deeply negative in the 2021 fiscal year that ends this month, with an adjusted loss of $1.86 a share. For now, Wall Street is counting on a rebound in the year ahead. That has helped push the stock up more than 300% in the last six months.
The rally may prove fleeting.
“We’re not seeing anything to get excited about,” Benchmark analyst Mike Hickey told Barron’s. “They’re missing numbers, not beating numbers.”
When it comes to GameStop, Hickey isn’t Wall Street’s most bearish analyst—that’s Credit Suisse’s Seth Sigman, who has a $3.50 price target. But Hickey’s target of $5 implies 70% downside from GameStop’s recent price of $18. GameStop traded below that $5 level just five months ago.
GameStop shares now trade at nearly 11 times enterprise value to estimated 2022 earnings before interest, taxes, depreciation, and amortization, or Ebitda, according to FactSet. That puts GameStop’s multiple nearly in line with
(TGT), a retailer that has adapted well, with growing sales, despite the pandemic and pressure from
We’re not seeing anything to get excited about… They’re missing numbers, not beating numbers.
Shifts to online game downloads and the rise of in-game transactions have amplified an already tumultuous environment for GameStop, which has long relied on physical game discs, particularly the buying and selling of used games at its stores. Those used games carry higher margins than new game discs, especially since GameStop often attaches profit-rich extended warranties to the used games.
But there’s less to sell used when gamers rely on download codes and digital copies of games. In its September quarter,
(ATVI) reported a net booking figure of $1.77 billion, up 46% year over year. Of that total, $1.61 billion came from products delivered through digital channels, up 65% from 2019.
Take-Two Interactive Software
(TTWO), which publishes hit games like Grand Theft Auto V, Red Dead Redemption 2, and the annual NBA 2K basketball title, more than 80% of its September-quarter net bookings were digitally delivered.
“Some of the really exciting thematic pieces that are sort of unfolding here, and have been accelerated because the pandemic, don’t seem to be helping GameStop—which just seems like this antiquated physical retailer,” Hickey says.
During its latest earnings call in December, GameStop CEO George Sherman said the company was making progress on its “digital-first approach, focused on delivering a best-in-class e-commerce experience along with an optimized retail footprint.” The efforts are very much a work in progress. The stock fell 19% on the earnings news. Asked for comment about the company’s strategy, a GameStop spokesman pointed Barron’s to a planned appearance from company executives at Monday’s ICR investment conference.
It isn’t just the digitization of games that’s hurting GameStop. There’s also the fact that many of GameStop’s stores are inside malls, which have been losing shoppers to e-commerce sites and big-box retailers for several years and were hit particularly hard during the pandemic.
GameStop has closed roughly 1,000 stores since 2019, which has helped stanch some of the bleeding. Efforts to sell mobile phones and wireless service proved unsuccessful, with the company selling its mobile retail unit in 2018 for $700 million.
GameStop’s recent stock run hasn’t been fueled by fundamentals but rather hope brought on by Chewy co-founder Ryan Cohen, who has built a notable stake in GameStop. Cohen argues that, with the right changes, GameStop can become a “dominant sector player.”
“The company remains in long-term secular decline due to its apparent unwillingness to pivot with urgency and grow with gamers,” Cohen wrote in a letter to GameStop’s board of directors in November. Cohen holds 13% of GameStop shares, according to a recent filing with the Securities and Exchange Commission.
Cohen declined to speak with Barron’s in time for publication about his GameStop plans, but he has laid out ambitious goals, calling for a strategic review of the business and for management to “share a credible plan for seizing the tremendous opportunities in the rapidly growing gaming sector.”
“Significantly upgrading e-commerce can provide for greater revenue capture across larger gaming catalogs, digital content, and community experiences, online trade-ins, streaming services, and esports,” Cohen wrote in the letter.
Esports is the burgeoning world of competitive gaming, where the most skilled players earn millions in prize dollars and ballooning salaries from professional teams to compete in titles like Riot Games’ League of Legends and Valve’s Counter-Strike: Global Offensive.
As of now, there’s little role for GameStop in the esports world. Will Hershey, CEO of Roundhill Investments, which sponsors the
Roundhill Bitkraft Esports & Digital Entertainment
exchange-traded fund (NERD), tells Barron’s that much of the real revenue in esports goes directly to the publishers of such games, who use leagues and big tournaments as marketing tools to keep players engaged and buying in-game items.
“I have a really hard time seeing a world in which people want to go hang out in a GameStop to play videogames,” Hershey says. “And to take that a step further, it’s very unproven whether there is demand for engaging with amateur esports.”
Cohen isn’t the only big investor to take aim at GameStop. In August of 2019, with GameStop shares below $4 a share, Michael Burry, of The Big Short fame, disclosed a 3% stake in the company. Burry thought shares were undervalued, pointing to GameStop’s balance sheet and predicting that the next generation of videogame consoles, due out in late 2020, would still include disc drives, extending GameStop’s relevance.
Burry’s call proved prescient. When the new consoles from
arrived in November, they each had versions with disc drives. Investors have been bidding up GameStop ever since. But now, Burry’s firm, Scion Asset Management, appears to be culling its position. During the September quarter, Scion sold more than a million GameStop shares, or about 38% of its stake, according to an SEC filing. A Scion representative declined to make Burry available for an interview.
Even as GameStop shares have soared, much of the investing world continues to doubt the company’s prospects. Some 58% of the stock available for trading is held short, according to data from S3 Partners, leaving shares primed for a short squeeze, when positive news sends short sellers rushing to cover their positions. That in turn creates demand for the stock, sending the price higher. Anyone making a bearish bet on GameStop should be aware of the phenomenon.
But short squeezes don’t change the fundamental issues facing GameStop. The company needs a bold new strategy, and, thus far, it hasn’t been able to deliver one. As for the stock, it may be running out of lives.
Write to Connor Smith at email@example.com