Gamestop Is Approaching Its Sell-By Date

Gamestop faces hard choices as same store sales decline and gamers are buying digital

Technology is a lot like a banana. It rots on a wharf, declining in value from the day it’s produced until the day it’s thrown out. Technology also has a sell-by date, as new technologies replace older ones, destroying business models. And Gamestop (NYSE:GME) stock has reached its sell-by date

Going forward, the cloud makes game stores obsolete. PC gamers now use online systems like Steam, from privately held Valve, to get games. Free-to-play and mobile games come from online app stores. The days of saving money by buying used games, which was Gamestop’s business model, are gone.

This is not exactly a secret. GME stock was at $46 back in 2015. At the start of 2019 it was a $15 stock, as the company looked for a buyer. Now, having admitted it didn’t find one, it’s an $11 stock.

Why People Bought GME Stock

Given the obvious market reality, I hear you ask, why were people still buying Gamestop?

The reason was the dividend, a yield that now tops 13% at 38 cents per share, $1.52 per year, on shares that sell for just $11.40 each. The problem, of course, is it takes about $150 million in net income a year to pay out that dividend, and Gamestop hasn’t been able to do that since 2017.

If you just looked at the numbers investors usually look at, like yield and price-to-earnings ratios, Gamestop would be a steal. The market cap is now less than half of one quarter’s sales.

But as Admiral Akbar said, “It’s a trap.” The current earnings estimate, $1.62 per share of net income on $3.22 billion in sales, looks like it will be very difficult to meet.

Gamestop Is a Dying Franchise

GME stock has no solution to the trends that are killing it, as was made clear in its Christmas results, with hardware, software and rental income all declining. Accessory sales, like controllers and handsets, did rise 28%, thanks to intensive games like Call of Duty from Activision Blizzard (NASDAQ:ATVI) and collectible sales were up, but you’re not going to grow a franchise business on Lavar Burton bobbleheads.

The company admitted in November that same-store sales are declining, and reported a loss of $488 million. This followed a loss of $25 million in the July quarter, and another loss of $106 million for the previous Christmas quarter.

The company does get a cash infusion from selling its AT&T Wireless stores, called Spring Mobile, for $700 million, but it’s now a video game and collectibles retailer, with lots of stores in dying malls and customers who are increasingly moving to digital downloads over hard copies.

The Bottom Line

GME stock is searching for its fifth CEO in five years, and the remaining analysts say its best options are reducing debt, closing stores and finding a way to go private.

Going private would let the company extract capital out of public view, cutting the firm to a profitable core and perhaps finding a new buyer who can use its assets as collateral for debt used to fund the purchase , then finding it a new business model that works in a cloud-based world.

Maybe private equity could sell Gamestop to Amazon (NASDAQ:AMZN), owners of the Twitch service, or Microsoft (NASDAQ:MSFT), which owns Mixer.

There are lots of ways this could play out, including a bankruptcy filing, but none are the kinds of games retail investors are going to be invited to play.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/gamestop-gme-technologys-sell-by-date-nimg/.

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