Small-box video game retailer GameStop Corp. (NYSE:GME) has been struggling for the past few years, like most other brick-and-mortar shops, as online sales wear down investor confidence. Many GME stock traders had their worries confirmed when Microsoft Corporation (NASDAQ:MSFT) announced a new subscription service that would allow gamers to pay a monthly fee in exchange for access to hundreds of games via the cloud.
Since the announcement, shares of GME stock have declined 6% — which begs the question, can GameStop recover? Should investors buy GameStop stock on the dip?
GME Stock Can’t Please Investors Forever
It’s possible that GME stock can make a comeback and the sudden pullback is a bit of an overreaction, but that scenario is unlikely. Buying GME now would be a very risky play as the company is currently clutching at straws and has very few catalysts for growth in the future.
The biggest factor weighing on GME stock is the digital revolution. The company’s bread and butter is selling and reselling game consoles and their respective software. However, with games becoming more readily available online, that business model is becoming antiquated.
Many GME investors pointed to the second hand market as a reason to hang on to GameStop shares. Being able to buy and sell second hand games was a good way for gamers to try out a wider variety of products.
However, if the gaming industry starts to lean toward subscription-based plans, the second hand market will likely wane. Gamers are unlikely to continue going through with the hassle of buying and selling physical games if they can pay a small monthly fee to have access to a wide variety of different games.
GameStop is likely to find it very difficult to cope with a shift to the cloud, as the company’s online presence is relatively small. Console makers like Microsoft will be happy to cut out the middleman and sell their games direct to customers via the cloud, leaving GameStop with very few options to evolve alongside the industry.
Another reason investors have been willing to overlook GME stock’s decline has been the firm’s dedication to delivering shareholder value. GME stock currently offers a 6.1% dividend yield after announcing a 2.7% quarterly dividend increase just last week.
That may sound enticing, but the firm’s impressive yield is almost certainly unsustainable considering the headwinds GME is facing. Investors are likely to see the dividend suspended in the future as the company works to pay off its debts.
Bottom Line on GameStop Stock
The future of the gaming industry is still unclear — it will take some time before we see whether new technology like virtual reality will catch on in a mainstream way, but many believe we will see a significant shift in the way that consoles are made and upgraded. That means there is a chance that GME will find some way to keep its stores relevant, but that possibility is a slim one.
GME stock is a risky play that has the potential to deliver big gains considering how far it’s fallen. There are very few factors, however, that point to a recovery for GameStop, but it’s more likely that the share price will continue to decline in the year to come. Investors would probably be better off taking their money to a casino than investing in GME stock.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
