Video game retailer GameStop (NYSE:GME) closed at $3.70 on Tuesday. That was a 3.14% loss, after a modest streak that saw GME stock climb from $3.21 on Aug. 15 to $3.82 at close on Monday.
The retailer is having a rough go of it, despite big moves this year that include hiring a new CEO, shuttering its ThinkGeek site and moving all those pop culture collectibles into GameStop stores to bolster sagging video game sales.
GameStop is struggling to adapt to a world that is increasingly digital and trying to cut out the middle man.
GameStop Is Struggling in a Digital World
Sales of physical copies of games are falling precipitously. In 2009, 80% of games sold were physical copies, but by 2018 that had dropped to just 17%.
Adding to GME’s misery, manufacturers and game publishers have been making moves to cut GameStop out of that digital business. Subscription services like Microsoft’s (NASDAQ:MSFT) Xbox Game Pass that give subscribers unlimited digital access to a library of popular games are increasingly popular. No sales there. Sony (NYSE:SNE) announced earlier this year that it would no longer allow retailers including GameStop to sell digital versions of PlayStation 4 games. That means selling Sony PSN gift cards is the only remaining way for GME to capture any of those sales. And nothing is stopping Microsoft from following suit.
The increasing shift to digital delivery of games doesn’t just hurt GameStop in the loss of the initial sale. Without a physical copy of the game, the company also loses out on the opportunity to have a player trade it in for reselling. Selling used video games has been a very lucrative line of business for GME.
For example, this post from Polygon notes that in one quarter in 2016, pre-owned and value video games outsold both new video games and console hardware combined, and had a gross profit margin of 46.4% compared to 13.1% for game consoles and 24.3% for new video games.
Console Sales Won’t Save GME Stock
Under normal circumstances, GameStop would be able to look to the holidays for a boost in sales and revenue. However, nothing about the past few years has been “normal” for GME.
In 2007, the company reported record-setting results over the holidays, notching up $2.33 billion in sales — a 34.7% increase over the year before. Video games were flying off the shelves (up 45% on the year) and the company reported seasonal shortages of popular game consoles. In December 2007, GameStop stock hit all-time record highs, breaking $62.
In stark contrast, the new reality was showcased in the company’s 2018 holiday sales report. The company sold $2.63 billion worth of merchandise, a 5% decrease from the previous year. While sales of new physical games copies were up 8.3%, sales of pre-owned hardware and games dropped 16.4% and console sales were down 6.1% compared to 2017.
This year could be even worse. There are some big video game releases for the holiday season including a new Pokemon title and “Luigi’s Mansion” for Nintendo’s (OTCMKTS:NTDOY) Switch — but with digital sales dominating, the benefit to GameStop could be limited. Speaking of Nintendo, the company will release a new Switch Lite console in September, but this less expensive version of the original isn’t expected to cause a stampede.
In fact console sales in general are shaping up to be a sore spot in GME’s holiday sales. With Microsoft and Sony both releasing new consoles in 2020, sales of the current generation Xbox One and PlayStation 4 are taking a hit. Foreshadowing what’s in store for GME, Advanced Micro Devices (NASDAQ:AMD) has already warned that sales of its semi-custom chips (primarily found in the Xbox One and PS4) will generate lower than expected revenue for the rest of the year.
In other words, don’t look to blockbuster console sales over the holidays to boost GameStop stock.
The Bottom Line on GameStop Stock
GameStop stock has been a losing bet for years. Near $3.70, it’s down 94% from the glory days of 2007, and 2019 hasn’t seen much good news. GME is off nearly 77% since flirting with the $16 level in January.
A new CEO and a focus on collectibles is helping a bit, but the biggest foreseeable boost to GME stock is likely to come in fall 2020 when next generation video game consoles are released. That should make for a solid holiday quarter that year, but then it’s back to the usual for GameStop. And unfortunately for GME investors, the usual has been pretty dismal.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.