GameStop (NYSE:GME) stock got slammed since the past couple of years, due to a secular decline in physical games and with the late stages of the console cycle. The next console cycle should give GameStop a lifeline, and the company is expected to generate between $200 and $250 million unlevered FCF in 2019 and 2020 on an adjusted basis. Although the company is fundamentally weakening, the threat from digital/cloud gaming is low, and it would take years to develop.
Key Catalysts
1. New console cycle and impact of digital downloads
Online/digital gaming segment of the video game industry is exploding. Data from IBIS world shows that online games constitute 65% of the video game industry while physical games, consoles and accessories account for 17%, 13% and 6%. Introduction of mobile games and digital game downloads has stalled the growth of console, physical games and accessories market. I expect digital gaming to proliferate for the next few years, with tech giants eating up incumbent players - Microsoft (MSFT), Sony (SNE), Nintendo (OTCPK:NTDOY), Take-Two (TTWO) and Activision Blizzard (ATVI) market share. A decline in demand for consoles and physical games would be a significant threat to GameStop's business model. Google (GOOG) (GOOGL) and Apple (AAPL) recently released Stadia and Arcade subscription-based gaming service. It could pose a potential threat to consoles and video game publishers, thus eliminating the need for physical retail stores.
Although broader industry trends are not in GME's favor, I think that physical games are not going out of fashion anytime soon and console demand will be steady in the future for the following reasons:
- A vast majority of popular games only serve single-platform play and gamers won't get the same high-quality user experience on other platforms like mobile phones and computers. For that reason, I don't see a direct correlation
