GameStop (NYSE:GME) had another terrible week in a year where the retailer has had a lot of terrible weeks. A close look at GameStop stock looks like proof of the adage, “if you don’t know what path to take, you already know where you’re going”… which, in this case, is likely nowhere.
GME’s second quarter earnings report on September 10 failed to meet already-low expectations. Not surprisingly, GME stock fell 10% the next day. For the year, GameStop stock is down 65% and over 70% since hitting its high for the year on January 18.
Investors are Saying its ‘Game Over’
GME stock is cheap, despite all attempts at a rally. Even after its disappointing earnings report, GameStop stock has remained above its 20-day moving average with an RSI in the mid-50’s. Unfortunately, the last time GME featured this combination of a stock price above its moving average and an RSI at this level was in January. The stock collapsed shortly thereafter.
And what tells an even grimmer story for GME stock is that there have been only five trading days this year that saw the stock trade with significant volume. On four of those five days, the volume has been predominantly selling volume with the lone exception seen on August 22.
These Stories Seem to Have the Same Ending
The last of our local video stores closed recently. I had been in the store about four months early. The only reason I went there was to find a few titles that were not on Netflix (NASDAQ:NFLX). Walking through the store with cut rate prices and a shopper experience out of the 90s, I couldn’t help but wonder how it was still in business. I guess my question got answered.
Now let’s fast forward to last month and the release of Madden 20. I bought it for my son as an off-to-college gift. Ironically, we bought it at GameStop, but only because it was sold out at another store. We actually had to drive into the strip mall to check if it was still open. Walking into the GameStop, I had that deja vu all over again from the video store. A cluttered shopping experience and that “hmmm” of just how was it staying in business. Oh, and the clerk couldn’t find me in their system.
GME’s Failing Business Model
The move to digital made renting movies from a store, and the hardware required to play them, obsolete. The same thing is happening to GameStop. More gamers are downloading online titles directly to their console. The middleman is not necessary. True, the company will still have some relevance. The new gaming consoles arriving in 2020 will still have disk drives, ensuring that popular titles will still require a disk.
But GameStop lost the exclusivity of its stores as retailers like Best Buy (NYSE:BBY), Walmart (NYSE:WMT) and Target (NYSE:TGT) entered the market. The company had a brief resurgence when it began selling high-margin, pre-owned video games. But sales of those games are also falling — upending a strategy to be one of the few places that buy video games — and the retailer is not going to be able to rely on new hardware sales, even with the new gaming consoles.
Management Pledges a New Path
Facing investor pressure, management has plans for GameStop to blaze a new path. On the post-earnings conference call, CEO George Sherman said the company was going to be embracing esports in a big way, saying he hopes the company’s stores will become an experience for gamers. “We are committed to creating a social and cultural hub of gaming within each GameStop store, online and within the digital environment,” he told analysts.
I wonder if management is committed to that path. After the disappointing earnings report there was talk about “de-densifying” its footprint (i.e., up closing as many as 200 stores) and taking other efficiency measures, such as a stock buyback program and eliminating its dividend (which it did in June), as a path back to profitability.
What’s Next for GME Stock?
I can see a situation where GameStop becomes a major sponsor for esports events, as Zacks suggested. It does have a strong cash position and as long as management is not using the cash on a dividend, why not? But I’m less sure if the “store as a hangout” model works.
Gamers today are comfortable — more comfortable in fact — playing their friends or strangers online in the privacy of their own home. Having gamers go to a GameStop to watch other people compete, or even to game themselves, would be kind of like watching a movie at a video store. But that’s not taking a bold new path, it’s trying to landscape the path they’re on, and that doesn’t lead anywhere I want to touch as an investor.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.