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3 Reasons Digital Downloads Drag Down GameStop

Apr. 15, 2018 10:26 AM ETGameStop Corp. (GME)ATVI, EA69 Comments
John Miller profile picture
John Miller


  • File size and download speeds no longer pose a barrier to online download of video games as global fixed broadband averages exceed 40 Mbps.
  • As inventory of possible preowned games diminishes, GameStop’s overall profitability rate diminishes because the mix shifts toward the lower profit new software and hardware categories.
  • GameStop’s share of sales falls significantly for new games, digital downloads, hardware and accessories, and even collectibles as the $750 million trade-in subsidy withdraws.
  • Fewer physical games are published each year and consumers play games longer, reducing inventory for GameStop's preowned category.
  • Expect sentiment to worsen as cash flow expectations decline, debt exceeds cash on hand, and questions are raised if both the divided and store remodels can be maintained.

On the digital side of gaming, that's obviously the overhang that drags down the GameStop stock.

GameStop CFO Rob Lloyd – November 2017

When GameStop (NYSE:GME) announced 4th-quarter results at the end of March, both Q4 earnings and revenues beat expectations. But weak guidance, which projected 2018 total sales down 2% to 6%, rattled investors. Share prices fell 10% during the next day’s trade. Down 40% over the past 52 weeks and at a 13-year low, share price had bottomed. During the coming weeks shares regained most of their post-earnings fall.

Market commentary and sentiment shifted and began focusing on GameStop’s apparent deep value. Eighty percent of analysis here at Seeking Alpha turned positive. The following three quotes from Quad 7 Capital’s recent commentary on valuation are indicative of the common perspective:

…we see shares are trading at 4.18 times forward earnings …the price-to-sales is very attractive, currently at 0.38 times forward sales at the conservative end of guidance.

Long-term debt is $817 million, about flat from a year ago. This is high, but not obscene. The company also has $864 million in cash and equivalents and sufficient cash flow to cover all of its liabilities. Moreover, the company pays a bountiful dividend, which is covered, comfortably. The dividend, which has been raised every year, is now offering a yield of 12%.

In addition, not only is it covered from an earnings perspective, but with projected free cash flow for 2018 at $300 million, the dividend payout ratio is still a paltry 50%.

While analysts have keyed in on the strong valuation metrics above, they do also recognize concerns that the shift from physical to digital delivery of games will impact GameStop’s large preowned business. However, the general consensus is that this decline is slow. Consider the following from a

This article was written by

John Miller profile picture
Experience as a senior manager for a large retail chain. Managed multiple locations with sales in the low seven digits. Hands on P&L responsibility and controllable costs management experience. Expert in customer care and customer care training for team members. Studied international affairs at the George Washington University with a specialization in economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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