Shares of GameStop (NYSE:GME) tumbled nearly 30% to decade lows on Tuesday, Jan. 29, after the archaic video game retailer announced that it had abandoned plans to sell the company. Those sales plans — coupled with a Wall Street Journal report, which said that a buyout could happen as soon as February — led to GME stock rallying from $11 and change on Christmas Eve 2018, to $16 by late January.
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All those gains were wiped out in a single day. Following the “we aren’t selling the company” announcement, GME stock dropped back to $11 and change.
GameStop stock might bounce here. It’s technically oversold, and you could get a mini-rally back to non-oversold levels. But, that mini-rebound rally won’t last long.
With the M&A catalyst gone, GME stock is a dead duck. The need for a physical video game retailer is becoming increasingly obsolete, even on the video game hardware side, thanks to cloud gaming. As such, this company does have Blockbuster written all over it. The bleed in Blockbuster stock didn’t stop until the company and the stock found themselves in the graveyard.
The GameStop narrative will play out in a similar manner. As such, so long as management isn’t looking to sell GameStop, investors shouldn’t look to buy GME stock.
M&A Catalyst Is Off the Table
For a while, it looked very possible that GME stock was going to be taken out at $20 per share by private equity firm Apollo Global Management.
In 2016, Apollo saved Outerwall, the parent company of DVD-rental business Redbox. Much like GameStop, Redbox was a physical retail business that was being disrupted by the widespread streaming trend. Yet, despite those challenges, Apollo bought Redbox, betting that the company would produce enough cash flow on its way to the graveyard to produce a suitable return on investment.
As such, when the Wall Street Journal mentioned in early January that Apollo was interested in buying GameStop, all the dots connected. Such an acquisition fits into the Apollo wheelhouse, and GameStop desperately needed to do something to save underwater shareholders. It would’ve been a great deal for all involved parties.
But, it’s not happening. The Board at GameStop announced that the for-sale process is over. Now, it’s back to business as usual for GameStop.
Unfortunately, business as usual for GameStop isn’t good business. It’s the sort of business that will lead to continued weakness in GME stock.
Not Much Value Left
The overarching bear thesis on GME stock is that the company’s main business (selling physical video games) is quickly becoming less relevant in the era of downloadable games. Eventually, that business would go extinct, and GME stock would fall to zero.
The bull thesis, meanwhile, was predicated on the fact that even though the physical video game business was heading for the graveyard, the hardware business was not. The rationale was that there will always be demand for video game consoles, and those can’t be sold digitally.
That rationale is flawed.
To be sure, video game consoles can’t be sold digitally. But, video game consoles themselves will become extinct within the next decade due to the widespread emergence of cloud gaming. Cloud gaming is the ability to stream video games through the cloud. Think Netflix (NASDAQ:NFLX) for video games.
For a long time, cloud gaming was thought to be impossible. Now, though, everyone from Electronic Arts (NASDAQ:EA) to Apple (NASDAQ:AAPL) is jumping head-first into cloud gaming. Eventually, this dream will become a reality. When it does, consumers won’t need physical video game consoles, and they won’t have any need at all to go to GameStop stores.
As such, it is only a matter of time before GME stock finds itself in the graveyard. That’s a ride investors should avoid at all costs.
Bottom Line on GME Stock
Cloud gaming will inevitably make GameStop’s operating model entirely irrelevant. As that happens over the next several years, GME stock will only trend lower. Thus, with a potential M&A catalyst off the table, there’s no reason to own GME stock here and now.
As of this writing, Luke Lango was long NFLX, EA and AAPL.
