From a technical and fundamental perspective, GameStop (NYSE:GME) stock looks terrible, and that’s putting it lightly. In 2019, GameStop stock has dropped 6.5%. But that somewhat modest decline doesn’t really tell the whole story.
Soon after the new year dawned, anticipation that the embattled video-game retailer would be acquired sent GameStop stock soaring. By Jan. 28, GME stock had delivered over 24% of quick and easy profits to speculators. However, core realities came to the forefront, dooming those who didn’t sell GameStop stock quickly enough.
Despite strong overtures, management failed to find any interested buyers, and in fairness, it was a big ask. Over the last few years, the company’s revenue growth first flattened, then declined. While GameStop offered consumers multiple options at very attractive prices, technology reared its ugly head.
Video-game streaming and subscription services offered the same services as GME, but with the convenience of in-home purchases. Worse yet, the retailer, which sells Sony (NYSE:SNE) hardware and software, began to view the Japanese company as a rival in the lucrative streaming space.
When management finally announced that it’s no longer trying to sell the company, it was game over. GME stock crumbled on the news. A little more than a month after the disclosure, sentiment towards GameStop stock remains low.
Naturally, high-profile failures like Blockbuster or Sears (OTCMKTS:SHLDQ) come to mind. The increased use of digitalization upended both retailers’ core revenue channels. Furthermore, an inability to adjust quickly and effectively compounded the crisis.
Blockbuster particularly provides a blueprint for GME’s potential impending disaster. With the arrival of streaming companies like Netflix (NASDAQ:NFLX), consumers had no need for the brick-and-mortar entertainment shops that Blockbuster provided. The bears contend that GameStop stock will be another victim of digitalization.
However, the situation is not that simple.
GameStop Stock Is Complex
I’ve encountered the arguments about the similarities between GME and Blockbuster for years as GME stock began to tumble. I’m not sure if others have cited parallels between Blockbuster and Sears. Either way, I don’t like these or other analogies because they don’t quite fit GameStop’s outlook.
Let’s be clear about these cautionary tales. In pretty much all these cases, digitalization utterly replaced physical stores. In the case of Blockbuster, Netflix provided a quicker, more convenient way to obtain the exact same product. Unless you really wanted to get in your car late at night and go to a store where you could encounter homeless people, streaming movies was a better option.
Although it might appear that streaming services are also replacing brick-and-mortar video-game stores, that’s actually not the case. In fact, I’m going to say something shocking: it’s impossible for content streamers to replace GME.
Before you bombard me with nasty e-mails, let’s look at this logically. Modern gaming consoles like Sony PlayStation or Microsoft (NASDAQ:MSFT) Xbox feature almost lifelike graphics with superb frame rates. To duplicate this enormous data transfer wirelessly is an extremely tall order. That’s why I’m not that impressed with Amazon’s (NASDAQ:AMZN) foray into video-game streaming.
Even if streaming technology evolves to the point where it could handle today’s games, guess what? The console-makers themselves will improve their craft. It’s simple science: with consoles, you can utilize insane amounts of data with none of streaming’s performance-lag issues.
And because no one is replacing consoles, I can’t jump on the “sell GameStop stock” bandwagon. However, bears might contend that game developers could sell their games directly to the consumer via downloads. But GME can counter with its low-cost, used-games business model.
After all, you can’t download a used game.
GameStop Stock Is Worth a Gamble, But Not Much Else
So does that mean you should buy GameStop stock? Unfortunately, I can’t decisively recommend that move. While I believe that GameStop remains relevant in the streaming era, that doesn’t mean that GME stock will become profitable.
No matter how you look at it, GME stock is a choppy mess. Investors previously forgave its poor financials because of a possible acquisition in the near-term. With that gone, investors’ emotions will weigh heavily on GME stock. That’s not a good place to be.
However, buying GameStop stock based on speculation isn’t a bad idea. I’ve visited several GameStop stores recently, and they are always abuzz. Of course, you shouldn’t place too much emphasis on my anecdotes. However, I also visited Sears’ stores before its meltdown, and it was like shopping at a morgue.
GameStop just doesn’t carry the vibe of an organization facing a crisis. Part of the reason why is because deep down, management knows it still has much to offer.
As of this writing, Josh Enomoto is long SNE.