GameStop is dipping down toward its 52-week low of $18.72, and for good reason. To say this video game retailer is struggling would be an understatement. If you have any confidence in GameStop’s business model, it is time to reassess your stance.
Walk into any GameStop, check the prices of video games and consoles, pull out your smartphone and start comparing. You will undoubtedly find GameStop’s prices are either higher or equal to those of the competition. Yet, plenty of customers are willing to pay higher prices from a traditional brick-and-mortar retail outlet like GameStop simply due to the convenience factor.
It is quite easy to drive to GameStop, pick up a game or a game console, and head home to play. The other option is to order online and wait upwards of a week or longer for the delivery.
The question begs: why isn’t GameStop raking in the cash?
GameStop’s Latest Quarterly Results
Though GameStop enjoyed a short-term sales boost from increased console sales, the company’s overarching profit is down. Gamestop’s second quarter report indicated aggregate sales increased thanks to the public’s unquenchable thirst for the Nintendo Switch. Yet adjusted profits were down, well below the street’s expectations.
The company’s quarterly revenue of just under $1.7 billion represents a 3.4 percent year over year increase. This figure is $50 million more than the average Wall Street analyst’s estimate. GameStop’s new hardware sales soared nearly 15 percent year over year to slightly less than $250 million, primarily because of the Switch’s success. However, the company’s new software sales dipped 3.4 percent to just below $370 million.
Sales of pre-owned games and consoles fell more than 7 percent to $501.8 million. Though sales of the Gamestop’s collectibles increased 36 percent to $122.5 million, the company’s core business of video games and consoles is not living up to expectations.
GameStop blames its earnings drop on higher than expected costs as well as administrative and general expenses increasing by nearly 5 percent across the past year. All in all, the company anticipates comparable sales growth for the year to be between negative 5 percent and a zero percent flat-line. Those figures are quite concerning for a business that operates in the bustling video game sector.
The Pre-Owned Problem
GameStop’s most profitable offering is pre-owned software and hardware. The company dramatically hikes up the price of pre-owned games and consoles after paying comparably little when purchasing those items from gamers.
It appears as though gamers are catching on to the fact that the company’s prices for pre-owned games and consoles are egregiously high compared to those of online competitors. GameStop’s pre-owned sales performed quite poorly in the most recent quarter, dropping nearly 8 percent. There is good reason to believe this trend will continue. Take a look at the prices of pre-owned video games and consoles on eBay, Amazon and other websites. They are quite low compared to GameStop’s prices.
Digital Sales Could Leave GameStop in the Dust
GameStop sells little beyond video games and gaming consoles. This is cause for concern, as buyers are gradually migrating to the web for video games, video game consoles and gaming-related accessories. In fact, plenty of customers buy games directly from Nintendo and Sony through their web-connected consoles. It is clear that the days of retail games sales are numbered.
Though GameStop’s stock price looks a bit tempting in relation to its earnings, there is a question as to whether the company’s earnings will be sustainable across posterity. It is possible that the retailer could make a massive pivot to digital sales, yet there is no guarantee the company could capture a large portion of the market share.
The company sells used games on its website yet the prices are still fairly high in relation to the competition’s. Furthermore, GameStop’s online sales process leaves a lot to be desired. There is no doubt the company has cast its lot in the traditional brick-and-mortar retail business. It is a decision that could ultimately doom this once-thriving business.
Sell or Short GameStop
There is no sense buying stock in a company that recently reported an earnings drop of 44.4 percent on a year over year basis. Do not let the fact that GameStop beat revenue expectations sway you into being a bull.
The public will likely cool off on Nintendo’s Switch console a few months after the release of Mario Odyssey. Once the Switch sales slow down, GameStop will have a major problem on its hands. Only so many collectibles can be sold. Most people are uninterested in gaming-related collectibles so don’t expect them to buoy the company’s stock.
Add in the fact that GameStop cannot escape the problem of digital downloads, and there should be no question as to how investors should approach this stock: sell. If you are especially bearish on GameStop, buying put options is also worth considering.
Regards,
Ethan Warrick
Editor
Wealth Authority
