Can non-fungible tokens (NFTs) save video game retailer GameStop (NYSE:GME)? The immediate reaction appeared to be “yes,” judging by the fact that GME stock jumped more than 20% on news that the brick-and-mortar retailer is planning to develop an online marketplace for NFTs, which are often referred to as digital art.
According to various media reports, GameStop is holding talks with cryptocurrency and blockchain operators about the digital tokens that would be included in the marketplace. The company is planning to invest hundreds of millions of dollars in NFT content creators and game studios to get them to develop products for its NFT marketplace.
The move is the latest attempt by GameStop to reinvent itself as an online company and move away from its retail roots. However, while retail investors initially sent GME stock higher on the news, the gains ended up being short-lived. So far in January, GameStop’s share price is down 28% to $106.36 a share, its lowest level since February of last year.
Meme Meets Crypto
Non-fungible tokens are digital tokens built on a blockchain that provides them with a unique identifier that is hard to duplicate. Over the past few years, everything from paintings to baseball cards to rock albums has been produced as NFTs, with many of them fetching millions of dollars at auction and through private sales. One piece of artwork by the digital artist Beeple sold at auction last March for $69 million.
Market research firm DappRadar estimates that more than $25 billion of NFTs were sold worldwide last year. Given the popularity of NFTs, it kind of makes sense for GameStop to pivot in that direction. NFT marketplaces have been attracting high valuations amid the current craze. The biggest marketplace for NFTs, called “OpenSea,” was recently valued at $13.3 billion during a fundraising round.
Sales of NFTs on OpenSea reached a monthly volume peak of $3.4 billion in August, up from less than $100 million in February. OpenSea makes money by taking a 2.5% cut of every transaction on its marketplace, a business model GameStop is likely to replicate once its own NFT marketplace is up and running.
More broadly, the expansion into NFTs fits with GameStop Chairman Ryan Cohen’s digital and online push. Cohen has said publicly that he wants GameStop to eventually become the “Amazon of gaming.”
Cohen previously launched Chewy (NYSE:CHWY), the e-commerce company dedicated to animal and pet products. The retail traders who congregate on the WallStreetBets Reddit site and helped turn GameStop into the original meme stock seem to support every move that Cohen makes, praising him on social media and hyping each announcement from the company as justification to push the share price higher.
However, long term, it remains to be seen if GameStop or its share price can stay afloat. GME stock is now 78% below its 52-week high of $483, reached a year ago at the meme stock frenzy peak.
GME Stock Likely Has Further to Fall
Outside the digital realm, GameStop remains a company that is struggling to reinvent itself and get its financial house in order. The Texas-based company’s revenue has been declining for years, dropping from $9.2 billion in 2018 to an estimated $5.1 billion in 2021, a nearly 45% decline.
With consumers increasingly buying or renting video games online, a trend that was accelerated by the pandemic when stores were closed, GameStop’s retail network looks increasingly antiquated. Some analysts have likened GameStop to outdated technologies like the VCR and Walkman.
GameStop’s steady decline has led its stock to be among the most widely shorted on Wall Street. The big short positions in GME stock are what enabled the Reddit mob to successfully execute a short squeeze last year. And while shares have managed to, so far, hold above $100, the price has been gradually deflating since last summer.
The median price target for GME stock is now $45, suggesting shares may have a further 58% to fall in the coming months. The high estimate on the stock price is currently $100, which is 6% lower than where the shares trade right now.
And while starting an NFT marketplace sounds exciting, it is by no means guaranteed to succeed. GameStop will face strong competition in the new arena it is entering, not just from OpenSea but also from Coinbase (NASDAQ:COIN), which operates an NFT marketplace as well as a cryptocurrency exchange. GameStop will have to spend heavily on promotion to encourage its legion of fans to actually buy and sell NFTs on its new platform.
The Bottom Line on GME Stock
Despite the recent NFT announcement, there is really no good reason to buy shares of this company right now.
If anything, the NFT plan, and other schemes, distract from the fact that GameStop is a failing enterprise with an outdated business model. Any real, legitimate turnaround for GameStop has to focus on its revenue and profitability. Dangling bright, shiny objects in front of investors is not enough to change the company’s fortunes and position it for future success.
With its myriad of problems and the continued volatility in its share price, GME stock is not a buy.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
