With the continued emergence of downloadable games and the consumers decreasing need for the physical copy of games, is now the time to get out of GameStop? Driven by the COVID-19 pandemic, the reality has set in that brick-and-mortar stores are no longer needed for the majority of the products consumers purchase, the digital world is taking over global markets as consumers can get what they want from the comfort of their own home. And in the case for video games, can download it within hours and sometimes minutes.
GameStop (NYSE:GME) is a distributor for the larger corporations like EA (NASDAQ:EA), but with the shift towards digital, those companies no longer have the same need for a distributor and for the most part can provide their products directly to the customer without taking a hit in revenue and net bookings.
As provided in their latest Q2 Earnings Presentation back in November of 2020:
- 56% of units sold on the Xbox One and PlayStation 4 over the last 12 months were digital
- The first 8 weeks of Madden NFL 21 sales were 66% digital
- The first 3 weeks of FIFA 21 sales were 50%
- Each were 14 point increases from the year prior
EA believes this is likely a structural change. Even though it was driven by the pandemic and lockdown measures, this trend seems to be becoming a reality. Going even further in this digital shift, is the revenue takeover by their ‘Live services and other’ section compared to ‘Full game’. Live services includes subscriptions, advertisements, esports, and game software, essentially everything besides the actual games themselves. Revenue fell 14% compared to Q2 the year prior, but what really stands out is the 51% decrease in ‘Full game’ revenue and the 13% increase in ‘Live services and other’. Games themselves are becoming less and less popular amongst gamers, and within that, more are going digital and just purchasing the games for download instead of physical copies.
This possible downturn has been coming for a number of years now for GameStop (NYSE:GME). As an organization geared towards brick-and-mortar in a world that keeps moving towards becoming more digital, it only makes sense that since 2015 their net sales have been dropping and their net (loss) has fallen off significantly.
Unfortunately for GameStop it isn’t just some of the financial numbers that have taken a downturn. Possibly the most public news about GameStop has been their store closures, which have been at an alarming rate since 2019. Mentioned in their Q3 2020 presentation and report, they have closed 800 stores since 2019, and were expected to reach 1,000 by the end of 2020. This was only natural like countless other businesses during this unprecedented year, but this has been a trend for GameStop for 5+ years.
GameStop still has time to ride the wave of the new console meanwhile. The new console cycles typically last around 6-7 years, as PlayStation 4 and Xbox One both released in 2013. The scary part about the latest console releases is that there was a version released for both PlayStation and Xbox that did not feature a disc drive. It is possible that we have seen the end of disc drives for these consoles.
So, is there still hope for GameStop? Well they are certainly giving investors some with their latest partnership with Microsoft (NASDAQ:MSFT). The deal is centred around two main points: Firstly, GameStop (NYSE:GME) will be using Microsoft’s back-end and in-store solutions through its Dynamics 365 platform to better meet customer needs. This will give GameStop employees real-time data for all customer needs regarding things like inventory and purchase history, while the Microsoft Surface products will enable employees to have immediate access to all the data, pricing, and insights the system will make available. The second part of the deal, which went unnoticed by many is that GameStop will receive a percentage of any digital game download, downloadable content, micro-transaction, or paid subscription generated from Xbox, as long as that console was purchased through GameStop.
This deal gave new life to GameStop, even though it might not have the revenue impact they will need to grow, it has certainly done its job in intriguing investors and increasing the stock price. This deal shows that GameStop is still here and ready to fight to keep building and moving forward.
GameStop Reboot is a process that began in August 2019 with a focused effort on stabilizing core business operations. From their achievements so far in this process, the digital first e-commerce platform can be what really saves them. A store that was solely built on brick-and-mortar and has relied on in-store purchases, the shift to digital won’t be easy and will take some time.
Is it time to sell GameStop? For some that answer is yes, but for now it might be best to hold and see what GameStop (NYSE:GME) has in store for the new year and beyond, and how the stock will react. With the most recent console cycle just beginning, combined with their new Microsoft partnership and e-commerce focus, GameStop might not be done just yet but it is definitely an uphill battle.