During the meme stock frenzy, investors made spectacular returns on GameStop (NYSE:GME) stock. However, GME stock has tanked more than 33% year-to-date. The business continues to lose money rapidly and has failed to adapt its business. Its prospects are poor, and it has yet to prove its ability to generate profits again.
It appears that the mood has changed dramatically after GME stock’s historic rally, ushering in the meme stock era.
It was the biggest story emerging from the stock market last year, which put the spotlight on the power of retail investors. However, GME stock has tumbled from its peak, as it trades at roughly 72% below its 52-week high price of $348.50.
Though the stock has slid considerably late, it still trades at unreasonable levels. Its business had suffered immensely during the pandemic, and it hasn’t recovered since. Hence, for shares to trade at pre-pandemic levels is indefensible
Bleak Outlook Ahead
The going has been incredibly tough for GameStop, mainly relying on its brick-and-mortar sales. The first three-quarters of 2021 saw it losing $234 million on its bottom line. Due to the ongoing pandemic, the business suffered incredibly with less on-foot traffic. Moreover, rent and lease payments were due regardless of the slow-down in topline growth.
Furthermore, the company lost $41 million more in cash during the first three quarters in 2021, compared to the prior-year period.
More importantly, though, its business is at a crossroads due to the dramatic shift in the gaming industry. GameStop is looking to move its spending into its eCommerce channels, but it’s too little too late.
OEM’s are offering the latest video games on their own networks, cutting out the middle-man. Moreover, the top video game publishers have also launched their cloud-based subscription services for their users.
If the digitization trends continue at such an incredible pace, it will be virtually impossible for GameStop to contend with the pressure. As we advance, digital sales will dominate the video game sector. Moreover, we are also seeing over the top (OTT) companies making their move in the industry.
For instance, Netflix (NASDAQ:NFLX) offers mobile games bundled in with its streaming service. As we advance, it will offer some of the most popular video game titles adding to the woes of GameStop and its peers.
Pivot To NFTs
During the last conference call, Chief Executive Matt Furlong discussed exploring non-fungible tokens (NFTs) and Web 3.0 opportunities. Moreover, he talked about how the management was “working on deals with at least a dozen crypto companies that will include investing millions of dollars in those firms for the purpose of developing games that use blockchain and NFTs.”
It will be interesting to see how its latest initiative could benefit GameStop in its resurgence. It would potentially keep the company afloat and save its revenues from going into a free-fall. NFTs recorded over $10 billion in revenues on the Ethereum network last year. This represents an increase of over 17,500% from 2020.
The economics of the move is still unclear, and the lack of clarity in GameStop’s vision is a cause of concern. It may result in short-term gains, but it’s tough to feel upbeat about the company’s prospects in the long run.
Bottom Line
GameStop has been one of the most covered stocks in the past year. GME stock shot up to unfathomable heights due to the meme stock mania. However, its stock price is emphatically returning to Earth.
Moreover, its business continues to disappoint as its lacks a clear vision for the future. Hence, it’s tough to see how the company can rebound anytime soon.
On the date of publication, Muslim Farooque 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
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
