Has the fun stopped for GameStop investors?

Has the fun stopped for GameStop investors?
GameStop posts a steep loss as management pivots to NFTs.
Paul Allison, CFA
March 18, 2022

Last night's results brought up an uncomfortable truth for GameStop (GME) shareholders. The company’s transition from brick-and-mortar to e-commerce will take time and a lot of money.

Despite increased sales for its holiday season quarter, a combination of higher costs to navigate challenging supply chain constraints and aggressive investment in its new ventures saw the company post a steep loss.

For all the crusading against evil hedge fund short sellers this time last year, as noble as that might have been, the original arguments held by Wall Street pros are being proven.

Video game makers like Activision and EA have been pursuing a digital strategy for close to a decade. Some of that strategy is about mobile games, but a major part of it involves game downloads directly onto consoles.

It makes sense for publishers to do this. They can form a closer relationship with players and, more importantly, they get to keep all the profit margin that that retailer would take for playing its part in the sale.

That’s bad news for GameStop which is just another intermediary being cut out of the profit pie.

The trend to digital has seen GME’s sales almost halve from a peak of $9.6bn in 2012 to $5bn in 2021. But it took the pandemic and subsequent meme stock frenzy to shake the company’s board into action.

New management’s answer is to develop its own digital strategy, including spending aggressively to create an NFT marketplace.

The problem is, online or not, GME is still in the middle, and the profit incentive to cut them out still exists.

If you speak to Activision's new owner Microsoft, video games in the future will be streamed, completely bypassing the need for any sort of download, digital or physical.

But streaming video games is probably a long way off, and if GME can build an online presence the same size as its store network, game publishers will want to be part of their distribution channel. 

This leaves NFTs. 

What the future holds for digital art is anyone’s guess, but GME’s new management has a strong pedigree in the technology industry, and maybe they can turn it into a big business.

So GMEs future might look brighter than it did pre-pandemic, but even after the recent drop, its stock price is still more than 10x its 2019 level. 

However the GME saga ends, there are plenty of big bosses to be defeated along the way.

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