Just before a business model becomes obsolete, as growth turns to stagnation, investors run for the hills, and a stock can become what seems like an incredible bargain.
I saw this with newspapers in the last decade. In previous decades, it happened with cigarettes and steel. Now it has happened in media, where the whole idea of buying from a store is being replaced by buying things online.
GameStop Corp. (NYSE:GME), as the name implies, is a store. It sells video games, both new and used, as well as consoles and ancillaries like cards and plush toys.
But this is a sick company. Co-founder Daniel DeMatteo has had to retake the reins following an illness to CEO J. Paul Raines, and the hand he has been dealt is not good.
The Problem for GME Stock
When fans of your company are comparing your latest offering to Blockbuster, you have a problem.
Blockbuster, if you remember, rented videotapes. Once upon a time, it was a big outfit, but it stayed with that in-store model and was made obsolete by Netflix, Inc. (NASDAQ:NFLX), eventually going out of business.
The GameStop idea is to collect $60 from gamers, then let them come to the store whenever they want, for six months, and trade one used console game for another. At the end of the period, the gamer gets to take a game home, free. This is its big Christmas season innovation.
Turning occasional rental income into subscription revenue is a good idea, but it’s been done. GameFly has been doing this by mail for years. That’s Netflix’ old business model. Netflix’ current business model, the online model, is controlled in gaming by Steam, a privately owned market whose controlling shareholder, Gabe Newell, is said to be worth $5.5 billion.
Meanwhile, GameStock is worth just $1.69 billion, and GME stock is selling at barely five times earnings in a market where the average price to earnings ratio is closer to 25. The stock is down by almost 34% in 2017, despite a nice 38 cents per share dividend which has pushed the yield up to 9.1%.
That last number is not a typo. Put $1 into GameStop stock today, and you are promised nearly 10 cents in cash over the next year.
Is GameStop Sustainable?
GameStop sells itself to investors as an “omnichannel” play, having bought the company behind ThinkGeek in 2015. GeekNet was originally an open-source software company and resource, through Sourceforge and other sites, but GameStop was only interested in the retail assets.
GameStop has also been buying back its stock using consistently positive cash flows. To our Luke Lango, this makes the stock too cheap to ignore. He believes the sale of consoles and accessories can keep the company going even after digital channels eat its present business alive.
The Bottom Line on GME Stock
The video game market is a curious one. It keeps growing, in terms of its share of consumer time, and it’s responsible for the low valuations presently given all other entertainment. But the companies within the market all seem to have trouble because gaming is such a bargain, and development costs keep climbing.
The question is, as Luke notes, whether the industry needs any kind of physical presence to sustain its growth. Right now, the market is saying it doesn’t.
But gamers are born, not made. That is, gamers start gaming as kids, and kids need toy stores to whet their appetite. I think Luke is right. GameStop may be a niche retail player, but it’s not about to disappear. The nature of the business may change, but there’s play in GME stock yet.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.