Why I Sold GameStop

A year and a half ago GameStop (GME) was one of the largest equity holdings in my portfolio. For those who are not familiar with the company, GameStop is the largest video game retailer in the US. I had held shares of GameStop for over 4 years and was excited by the company’s growth potential. The stock consistently rose over the years and even split once. GameStop even gained market share by buying out rival Electronics Boutique a few years ago.

So if things were so great, why did I sell it? I started thinking about some of the factors that Warren Buffett looks for in an investment like economic moats, high ROE, profitability and consistent operating results. While GameStop performed well in many of these categories; I discovered that GameStop failed in one significant area. The company had a small competitive advantage with little to no economic moat. I felt that GameStop had no significant barrier to entry that could protect it against the likes of a Best Buy (BBY) or similar competitors.

GameStop reminds me a lot of Blockbuster (BBI) in the 90’s. Blockbuster dominated the movie rental business and was the largest chain store rental business in the US. Blockbuster was so large that the company became stagnant and never noticed a small upcoming online retailer called Netflix (NFLX). Netflix changed the entire movie rental business and Blockbuster is struggling just to stay afloat.

GameStop still earns solid profits through its new and used video game sales business. But the company is facing increasing competition from Best Buy, Wal-Mart (WMT) and Amazon.com (AMZN). I can’t help but think that over the next 5-10 years, digital delivery will be the method of choice for consumers looking to purchase video games. Unless GameStop changes it business model and is the leader in digital delivery; the video game retailer will likely find itself obsolete.

Comments

[John316:]

GME = BBI? Maybe, like you say, 5 to 10 years down the road...but it is still too early to make this call. Two things I can think of that make this call too early: 1 - consumers do not treat games and movies the same way and 2 - technological solutions to draw gamers away from consoles is not on the horizon. While consoles can benefit and expand opportunities via the net, a net exclusive solution is not practical. Buying on the net, transfering to a computer, burning to a disc, playing in a console....give me a break.

May 22 06:55 AM

[STORMSTOCKER1:]

their Jan 09 earnings quarter was a blowout one,.......surpassing the last 3 combined....looks to still be making money........alot of it.

May 22 02:40 PM

[5 star redrum:]

I have to say that gme is very attractive and I see no competitors up and coming. In fact the mircosofted their way to the top of the heap. As far as a online only game system.....what about kids that live more then 30 mins from a city and don't have high speed or if they do it has to be beamed from space and has download and upload limits. I would rather invest in a tech that works rather the speculate on one that might. Did you also invest in men’s make-up in the 80’s? The only semi-valid point in this joke of an article is about the barrier to competition. I am not sure if you’re an American but I have a hard time waiting for more then 5 minutes in line to buy something and now you want me to wait for a game to be mailed to me. I am actually buying GME because I don't write for a living. It was well written......but the artist shouldn't try to think logically it is just embarrassing.

May 22 06:38 PM