GameStop (GME) will be facing a new opponent in the used video game market, now that Walmart (WMT) has announced that it will begin buying back and reselling used games. But investors shouldn’t sound the alarms … at least not yet.
Yesterday, Walmart officially announced the start of a new video game trade-in program, which will offer store credit to customers in exchange for their used video games. Those used games will go through a refurbishing treatment, after which Walmart will resell them at a discount.
GME stock took a hit on the news, dropping roughly 3%.
On the surface, the announcement seems like terrible news for GameStop; after all, competition could put pressure on what is a huge part of GME’s business.
However, despite Walmart’s size and presence, I wouldn’t count GME stock out quite yet.
GME Stock Has Proved Resilient
A couple of factors should shield GameStop from the threat of Walmart competition:
First, despite Walmart’s scale, it’s unlikely that the store will be able to offer substantially better prices for trade-ins and used games than GameStop already does. If scale were that much of an advantage, Best Buy (BBY) or Amazon (AMZN) would have delivered the death blow to GME stock years ago. But they haven’t.
In fact, a quick browse through the used games sections of Best Buy’s and GameStop’s websites shows that newer used titles are typically sell within $5 of the same price. It could be a matter of GameStop offering a larger selection of games, making it the more natural choice for trading in games.
Also, GameStop is a specialty store, selling video games, consoles and peripherals. If you’re shopping at GameStop, you’re going there for video games or something related to video games. In contrast, a trip to Walmart could be for any number of items — groceries, tools, school supplies. Sure, that means a trade-in at Walmart can be used to buy a wider variety of items … but is that difference really compelling enough to make gamers stop trading in at GameStop?
Again, we can point to Best Buy. The store offers a wide range of electronics, appliances and the like … so if customers were primarily concerned about the flexibility of their trade-in credit, Best Buy should have supplanted Gamestop as the go-to destination for trading in video games.
Again, it hasn’t. Nor will Walmart.
Of course, while GameStop seems clear for the moment, that doesn’t mean it’s worth buying GME stock on the current dip. Because while WMT isn’t likely to kill GameStop anytime soon, long-term industry trends eventually could get the job done.
As we’ve mentioned before, sales of physical game discs are plummeting at an alarming rate, as discs are replaced by more convenient digital downloads. And that one metric alone is enough to sink GME stock in the long term. There’s no money to be made on used games when those games only exist as digital copies.
Of course, it’s unlikely that publishers will completely stop manufacturing physical copies, and the switch won’t happen overnight … but the trend is still a powerful force that eventually will push down hard on GME stock.
Bottom Line
Short-term investors might be able to squeeze some value out of GME thanks to the recent releases of the Xbox One and PlayStation 4 consoles. The next-gen consoles might even prop up GameStop during its earnings report, due out next week.
But make no mistake, GameStop faces a major long-term challenge. It’ll survive Walmart, but it’s running out of lives.
Adam Benjamin is an Assistant Editor at InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.
