GameStop Stock: Not convinced by the company’s strategy (NYSE: GME)
Game Stop (NYSE: GME) saw a huge increase in its share price in the first half of 2021, from $17 per share to $300 per share. The driver of this rally was the well-known short squeeze, which eventually resulted in a whole wave of short-squeezes on so-called “meme-stocks”.
Although GameStop’s stock price has fallen over 40% in the past 12 months, its current price is still significantly higher than before 2021.
We understand that the current price is not the result of strong fundamentals, therefore trying to predict the potential price target in the near term, based on the company’s financial performance, is unlikely to be effective. .
For this reason, in this article, we will look at GME’s business from a broader perspective, focusing primarily on its strategy, what it could mean for the company in the short and long term, and the potential impact of lower consumer confidence in the implementation of GME’s strategy.
GameStop’s new strategy is based on two main pillars: diversification and blockchain. There are other initiatives in the strategy, including improving national customer service, improving the customer experience and loyalty programs, but we won’t go into those topics in detail now.
The company has indicated in its new “return” strategy that it aims to offer a wider range of products to its customers, including PC games, computers, monitors, table games, mobile gaming products and gaming TVs. Moreover, they aim to boost their digital presence and monetize on e-commerce.
On the one hand, we believe that the diversification of the activity, both in terms of products and distribution channels, is a reasonable and necessary step, in order to reduce the dependence on the sales of video games and collectibles in physical stores.
On the other hand, we expect GME to encounter substantial difficulties. Let’s examine two of the difficulties that we believe are the most crucial:
1. Likely contraction of margins
Selling video games, especially used games, was once a high-margin business, generating significant profits for GameStop. New offerings in the diverse product portfolio appear to be low-margin items, including electronics and even furniture.
GME’s margins have already been steadily shrinking over the past two years, and with these product additions, we don’t expect a sharp turnaround anytime soon.
It could be argued that the proposed increase in digital presence could have a positive impact on margins, but we see a different issue here.
As GameStop enters the world of e-commerce, it will face even greater competition from much larger and more established companies, including, for example, Amazon (AMZN) or Best Buy (BBY).
In our opinion, the closure of physical stores can certainly have a positive impact on margins, however, we believe that this impact will be partially or completely offset by increased competition. Right now, we don’t see any unique offering from GME that would give the company a competitive edge over its peers. Additionally, we think GameStop’s pricing power is likely to be very limited. When it comes to customer service and customer experience, we also think Best Buy has an edge.
Despite GME’s reported increase in revenue in the first quarter of 2022, we believe that the diversification part of the strategy is unlikely to significantly help GME survive in the long term. Overall, we believe that even with new product offerings, GME’s business is likely to become stale.
Additionally, GME has tried diversification in the past. The firm acquired in 2014 a retailer of wireless phones and plans, called Spring Mobile. Although the firm has been calling this segment the main growth driver for years, it finally decided to divest it in 2019, in order to refocus on video games.
Blockchain: crypto-currencies and NFTs
Many companies, including bigger players, like Meta Platforms (META), are betting on the growing acceptance and rising value of cryptocurrencies and non-fungible tokens (NFTs). GameStop is taking a similar gamble.
Recently, GME has spear a self-custodial Ethereum wallet, which allows users to buy, transfer and store cryptocurrencies. Users can also trade and store NFTs. This portfolio is intended to serve as the basis for the launch of GME’s NFT market later this year.
In our opinion, entering the world of crypto and NFT can actually be an attractive opportunity for GME in the long run. On the other hand, we have to mention the competition again as a crucial headwind, especially since Robinhood (HOOD) is also plans to launch its non-custodial portfolio in the near future. As Robinhood has a much larger product offering and an already existing user base, we consider them to be the best positioned player in the field.
We also cannot ignore recent trends in the crypto market. Cryptocurrency prices have fallen sharply in recent months as investors seek out safer investments. This trend has caused the stock prices of many operators of cryptocurrency exchanges, for example, Coinbase, to fall. This week, due to the significant drop in token values, several platforms even had to pause crypto withdrawals.
In our opinion, many investors are turning away from the crypto market, at least for now. In the short term, we do not expect cryptocurrencies to regain the momentum and popularity they had between 2019 and 2021. For this reason, we believe this part of GME’s strategy, due to the time of launch, isn’t too promising either. Short term.
Decline in consumer confidence
Consumer confidence has steadily declined in recent months, reaching its lowest level in 10 years and approaching the levels seen in 2008-2009.
Low consumer confidence will likely lead to a change in customer consumption behavior. For example, by reducing or delaying purchases of durable goods and non-essential discretionary items. As GME’s current and potential new products are discretionary products, we expect demand to decline. Additionally, we believe that the company’s diversification efforts could face significant challenges or even fail, as many of their potential new products could fall into the durable goods category, including electronics (such as monitors, game TVs) or furniture (e.g. game tables).
In addition, over the period 2008-2010, during declining consumer confidence, GME significantly underperformed the broader market, losing over 60% of its market value.
Overall, we believe low consumer confidence is likely to negatively impact GameStop’s strategy execution and overall financial performance.
Key points to remember
Despite revenue growth in the first quarter of 2022, GameStop’s stock does not look attractive.
The two key pillars of GameStop’s strategy, diversification and blockchain, are expected to face significant headwinds in the near term, due to declining consumer confidence and current market sentiment. Additionally, GME has a poor track record of diversification efforts, as the example of the acquisition of Spring Mobile illustrates.
In our opinion, GameStop’s competitors are better positioned in both retail and crypto.
We believe GME is a sell because the company can become obsolete if it fails to improve its strategy and execution.