GameStop Corp. (GME) stock tumbled today, slumping as much as 15% after reporting weaker-than-expected third-quarter results and lowering its guidance for the fourth-quarter and full-year 2014. The video game retailer took a major hit from the delayed release of Assassin’s Creed Unity, a highly anticipated video game that was expected to boost sales in the quarter.
GME revenues were $2.09 billion for the quarter, missing analysts’ expectations of $2.2 billion. Gamestop’s earnings per share (EPS) also disappointed, falling a penny to 57 cents from a year ago. Analysts expected 61 cents EPS.
Today’s selloff is bad, but GME stock isn’t a sell because of a delayed video game release. GME stock is a sell because of several ominous long-term threats I’m not sure it will be able to weather.
GameStop Must Battle the Retailer of all Retailers: Walmart (WMT)
Wal-Mart Stores, Inc. (WMT) is the largest big-box retailer in the world. Unfortunately for companies like GameStop — who for some time didn’t have to worry about Walmart elbowing in on their target customer — Walmart is getting desperate, as a six-quarter string of falling or flat same-store sales caused WMT to rethink its business.
Walmart’s response to the pressure Amazon.com, Inc (AMZN) taking a bigger and bigger part of the pie has been to cut costs, compete aggressively on prices, and expand to other industries. Earlier this year, Walmart announced that it was going head-to-head with The Western Union Company (WU), as Walmart launched its own, cheaper money transfer service. Walmart is now selling health insurance as of last month, and earlier this year GME stock took a hit when Walmart entered the used video game trade-in business.
GME stockholders have had to compete with Walmart in the new video game segment for years, but buying and selling used video games is one of GameStop’s big draws. The fact that WMT can afford to earn smaller margins than GME and WMT has enough clout to exclusively sell wildly popular games a day before their official release makes Walmart a fierce and relatively new competitor.
The Long-Term Death Knell: Digital Sales
Like everything else in retail, the sale of video games is increasingly moving to the digital realm. This is an absolute nightmare for GME stock, because so much of its draw comes from its trade-in program — a program that loses all its clout if there are no physical games to trade in.
Of course, GameStop also sells video game systems and accessories themselves, but with foot traffic likely to keep falling as digital video game sales become more prevalent, in-store purchases of those items will fall dramatically, too.
InvestorPlace‘s Adam Benjamin even noted about a year ago that the three-month, 15% rally in the price of GME stock was fueled not by the company’s strengths but by investor relief, as shareholders thanked their lucky stars Microsoft Corporation (MSFT) reversed its “no used games” policy for the Xbox One. He correctly notes in the article that such a move “could have been a death blow for the company.”
GME investors should disregard the lousy third-quarter results and think long-term. What happens when Microsoft or Sony Corp (ADR) (SNE) bans used games once-and-for-all? GameStop cannot avoid the inevitable, which is why I think GME is a stock to sell.
As of this writing John Divine held no positions in any of the aforementioned stocks. You can follow him on Twitter at @divinebizkid.
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