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GameStop: A Specialty Vendor Of Comfort And Solace For Trying Times

Jun. 12, 2020 7:14 PM ETGameStop Corp. (GME) StockNTDOY90 Comments
Value Adventurer profile picture
Value Adventurer


  • There has been rising demand for video games as people are forced to stay inside in the wake of the global pandemic.
  • The whole sector will benefit, and GameStop is not isolated from this positive trend. Nonetheless, the stock still trades at a low valuation.
  • Video games are a recession resistant industry, as they can provide solace in difficult times at an unparalleled value.
  • Investors should focus on the attractive fundamentals, not on the short interest, the activists, or prior console cycles.

As the impacts of the global crisis continue to become clear, the stocks of many industries and sectors have been re-rated to reflect the direness of the situation. Retailers, in particular, have been hard hit, as reflected by the increasing number of bankruptcies from companies like J.Crew and J. C. Penney (JCPNQ). In this environment, it is not simply enough to have a low valuation based on past results for a company to be investable. The world has changed and so have people's behaviors, at least for the foreseeable future. While the discretionary nature of apparel has become quite apparent when individuals are stuck indoors or are out of a job, the same cannot be said for video games. In tough times, video games provide a much needed respite from the calamities of life. Few retailers are better positioned to benefit from this trend than GameStop (NYSE:GME), the largest video game retailer in the world. While GameStop seems to unfortunately be quite a magnet for negative press, one should focus on what matters: the fundamentals of the business. While companies like Take-Two (TTWO) or Nintendo (OTCPK:NTDOY) are priced for success, GME continues to trade at a bargain-bin valuation. In this light, it is quite possibly the best value play to take advantage of the tailwinds in the gaming industry.

In this article, I will first delve into the macro trends for the industry as a whole and then analyze GameStop's position in the grand scheme of things, considering factors like the last earnings report and catalysts in the remainder of 2020.

Tailwinds for the Gaming Industry

First, let us look at how the video gaming industry as a whole has fared in March and April. According to the NPD group, "March 2020 tracked spending across video game hardware, software, accessories and

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Value Adventurer profile picture
Join me on a daring adventure as we seek out value in the jungle that is the stock market. The road will be perilous, but as the weaker hands are shaken off, the treasure of Alpha will be ours for the taking. My goal will be to seek out companies that may currently be out of favor but hold immense value. However, I will primarily share companies that have a significant margin of safety due to their beaten-down status and ideally have dividends to reward us while we wait. I will avoid purely speculative research candidates. Looking forward to hearing of your adventures as well! Disclaimer: My articles are not investment advice and should not be considered as such. You should always conduct an appropriate level of due diligence before making any investment decisions.

Analyst’s Disclosure: I am/we are long GME. 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.

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Comments (90)

Value Adventurer profile picture
Looks like GameStop's website has been giving an overhaul. Their latest sale is also featured on Nintendo's deals page: www.nintendo.com/...
Noteworthy as it is the only retailer promoted in that page currently.
Will know tom - :)
lotsofquestions profile picture
Shouldn't GME try to purchase Warner Gaming. If they want to survive isn't it this plus sign one of those Twitch gamer starts?
Jocubus profile picture
No way could GME afford the rumored $4B pricetag. And they have no expertise in game development
lotsofquestions profile picture
But wouldn't they be acquiring that expertise when they acquire the division (the employees). It would be part of the refresh as retail clearly is not what it used to be even if that is being exaggerated a ton. Why can't they raise the money from shareholders? Raise 5B. Buy this division and sign a couple of these e-gaming starts. Would spur interest and excitement. Their capitalization would be back to what it was pre the retail decline, but now they can access the gamestop brand with justification beyond retail . Shareholders would by into this strategy, no? Wouldn't you?
Adio Capital profile picture
@lotsofquestions your username checks out :)
Interesting perspective, however not sure on your goal. GME's management aren't on SeekingAlpha looking for business transformation ideas, and all we can do is speculate and say what they should or should not do. For my own investing, I am looking to forecast what will happen in the future, not just what I want to happen in the future; that's why we look at both bull and bear cases. If you want to try to change the direction of the board, you'll have to start a proxy fight or send those questions to Investor Relations; at least there is a chance to forward it to the board/CEO.

Right now I believe GME is trying to refocus themselves as being a niche specialty retailer, rather than broadening their scope to include game development (like @Jocubus said). E-Sports is more of an avenue for brand recognition to become the social hub of gaming. Development is a whole different game (pun intended)!
Jocubus profile picture
One area that is under-reported is the assault on GME's used game business, which has substantially under-performed in recent years.

The under-performance is partly due to the trends @John Miller mentioned - fewer releases being kept alive for longer due to downloadable content and updates. But I also wonder about the impact of things like Facebook marketplace, which make it much easier to resell games for a much higher price than GME offers.

Speaking from personal experience - I just moved and used Facebook marketplace to sell my PS4 Pro (+ RDR2 + Spiderman + God of War + Detroit: Become Human) for $350.

Based on the trade-in values on the website, GME would have offered me $175 for the PS4 Pro + $12 for RDR2 + Spiderman (not listed) + $3 for God of War + $5 for Detroit: Become Human

Total of $350 sold privately versus $195 for a little more work to list it on FB Marketplace

GME provides no value to consumers or shareholders - they should no longer exist
lotsofquestions profile picture
Isn't this an argument to not have executives whose experience is in the retail segment. I cannot believe they granted shares like that before the shareholder vote. I guess it may make them rich, but unsure how they will be able to live with themselves knowing they basically stole this wealth without legally stealing.
SuicidalLaurie profile picture
This is a mistake I'm seeing many analysts make.

Selling it privately may be a little more work for you, but it's a lot more work for many other people. You're clearly not GME's target customer – consider yourself fortunate that you have the ability and willingness to sell your items online.

@Jocubus you've offered fairly sensible opinions on here but suggesting GME provides no value to consumers is a ridiculous claim.
Jocubus profile picture
What value do they provide? The only things I can think of are minor and consist of: (1) Exclusive items or content they are able to negotiate for preorders (2) Low hassle way to exchange used games if you are price insensitive (3) Services to unbanked population

Item (1) is of dubious value - that content could just as easily exist and be provided to a larger group of gamers in the absence of GME negotiating exclusivity. I already addressed item (2) above - they are not competitive in the used game market for anyone willing to put in a little effort. Item (3) is somewhat interesting but I think it is a small population - and as a shareholder this isn't the ideal customer base to build a company on. This population also gets the same benefits at other retailers like Best Buy, Walmart, Target, etc

So let me somewhat amend my prior statement: there is no compelling or unique value GME provides to customers.
One thing that drives consumers to GME is trading in old games as well as purchasing used disc games. I'm sure margins on used games are super thin and dont add much to the bottom line but it does bring in foot traffic. Both the PS5 and new XBOX will be backwards compatible so consumers can shop used games from PS4 and XBOX One. One thought is consumers will trade in a bunch of old games/consoles for store credit and put that towards a new console. Food for thought...
Jocubus profile picture
This is incorrect - margins on used games have historically been the HIGHEST of all sales and made a substantial contribution to profit.

In fact, much of the poor results for GME has been due to the underperformance of the used game segment
Good to know. Thanks
Adio Capital profile picture
Taking a peek at the 2017 10-K, you can see the breakout of the gross profit margins:

New video game hardware 9.1%
New video game software 22.9%
Pre-owned and value video game products 45.5%
Video game accessories 32.5%
Digital 85.8%
Technology Brands 73.9%
Collectibles 32.7%
Other 31.3%
I was very struck by how the proxy fight was so tenacious. If this was simply a matter of rearranging the deck chairs on the Titanic, we would not have seen such a pitched battle. Clearly, there is a lot at stake. I hope the apparent board changes will prove lucrative for all longs. Let's hope substantial change is on the way in the near term as this company remains woefully undervalued.
Benjamin Graham Cracker profile picture
There’s literally no reason to walk into a GameStop. I can download new releases to my Xbox from my phone, and play them after work.

I bought my console online through Microsoft.

Game stores aren’t going to stage a comeback.
There's literally no reason to walk in to any store, yet people do, so what's your point? Is it that you're so narcissistic that you think everyone thinks like you?
I suppose one could say there's literally no reason to order online when you can go to Gamestop and get what you want now.
Adio Capital profile picture
The iPad, kindle and every smartphone exists, but physical printed books still have their place in the market, but at a reduced footprint. People still see value in physical goods!
Benjamin Graham Cracker profile picture
@Esteveo So what if you go to Gamestop and they don't have what you're looking for? I can download the newest video game in 10 minutes while I make some popcorn and I can play it. It's always in stock.

There's a reason next-gen consoles are being sold with no disc drive.

Call me a narcissist...but why would companies and developers pay to manufacture, ship and then sell discs? It behooves companies and customers to sell all of this stuff virtually. These things flow like water. Consumers and businesses will always find the easiest way to get the services they need.

Here's a question: In 5 years...will more people be shopping at Gamestop? Or will more people be downloading games via a Netflix-of-video games service like Gamestop?
lotsofquestions profile picture
I think bears, bulls both have good theories. Whatever happens each one will think they are smart and predicted it correctly. But what happens now and going forward is not really predictable. It really depends on the behaviour of the board and management. Will they loot the company, or care that their compensation actually supports the shareholders (taking 2+ million of cash when your not cash flow positive Quarter after quarter is as close as you get to stealing without actually stealing, 2.5 million just tot he board, how is that ethical when your company is loosing billions).. It’s all about leadership and business execution instead of headwinds and disc drive l vs. No disk drive.
lotsofquestions profile picture
Instead of giving 10% of the company to management and paying them 1% of the market value in cash, why not sign one of these gamers on twitch that have a commanding presence. I think that would attract more interest than anything in this industry.
Cyan007 profile picture
This is certainly part of the puzzle.
Josh Klein profile picture
Nice take. Thanks for the article.
A very interesting point: “A small point I do want to mention regarding GameStop's clientele is that many may be forced to patronize GameStop specifically because it has a physical presence. Believe it or not, at least within the US, there are a sizable percentage of adults who do not have bank accounts or are underbanked, around 25% as of a study in 2017 by the FDIC”, almost seems unbelievable in this day and age.

It would be interesting to know from GME what percent of their business was in cash versus card purchases in 2019 for instance to understand how meaningful this aspect may be. Has anyone seen any mention of this sort of thing in past 10-Q or 10-Ks or asked any GME store owners this question?
SuicidalLaurie profile picture
This is a factor under-appreciated by GME bears.

"Everyone downloads their games these days – everything is going digital. Nobody shops there anymore."

Yet in the final year of a console cycle, in the depths of a pandemic during which they had to completely close their stores, they still generated $1 billion in sales in a single quarter.

GME serves a retail niche. Maybe not yours, but the niche exists and it's palpable for anyone paying attention.
John Miller profile picture
@SuicidalLaurie for perspective divide a billion by the store count then divide over the three months. Or better yet, divide it by the employee count and you can see that it is not really sustainable especially when a third of the workers get benefits. You can’t just have one team member per store either, they need breaks and get sick or have to help a child and such. Then you have the bulldog which is the monthly rent and you have to kick up your share for the Corp to manage the inventory and the website and those stock options aren’t paying for themselves. Oh yeah, the ATVI bill is due.
SuicidalLaurie profile picture
@John Miller

If you would, I'd like to ask you two questions, here on June 13, 2020:

1) What probability do you assign to GME's stock price rising to $15 by year-end?

2) If GME's stock price does rise to $15 by year-end, to what would you attribute the rise?
what type of internet connection you have?
Nice article.. Just want to point out.. During this time Gamestop was actually at a disadvantage to their customers for this very reason.

"A small point I do want to mention regarding GameStop's clientele is that many may be forced to patronize GameStop specifically because it has a physical presence. Believe it or not, at least within the US, there are a sizable percentage of adults who do not have bank accounts or are underbanked, around 25% as of a study in 2017 by the FDIC"

Gamestop was not taking cash or debit. While target, walmart, costco were. They are actually just now taking cash in some stores.
stevenhoo profile picture
Companies like GreenDot have been helping those who are underbanked during this pandemic so that they can also shop via cards.
Value Adventurer profile picture
@xeloris That was actually why I mentioned that point, as the results they had should take into account this disadvantaged state. Once stores open up, those customers may boost numbers.

And good point on prepaid card providers like GreenDot, @stevenhoo.
J.C.J profile picture
What bothers me is that 5% comps decrease of open stores in May. Yeah, there is limited foot traffic, so maybe it's good. Still, videogame sold in May were something like 30% more than last year.
NOOB123 profile picture
Games on Steam are also collectible, because you can delete them and re-download them anytime you want. And you never have to worry about losing the game or damaging the disc. This is the same for games downloaded directly to Playstation or Xbox.

Internet download speeds are only getting faster. Now you have Sony, Microsoft, a bunch of game developers, and Steam all competing to sell games digitally. Playstation 5 even has a digital-only version, which confirms that owning physical copies of games will eventually die off.

Gamestop is not viable long term.
NOOB123 profile picture
Also forgot to mention, it is in Sony, Microsoft, and every game developer's best interest to move games to digital only.

People buying and selling used games mean less profit for game developers. Historically, game developers were constrained by technology. But internet speeds are only getting faster. And now you have things like Starlink being under construction for the rural population.
Noob, I agree in the long term GME will likely be a lot smaller dealing with a more niche market, but that doesn’t mean that the stock isn’t undervalued.
Noob, one other thing, as you say internet speeds are getting faster (and I still see 5G as a threat in the 3+ year timeframe) but file sizes will also get bigger as consumers want more immersive and in depth gaming.

If we compare a Commodore 64 in terms of computing power to computers now, file sizes are a lot bigger these days but CPU speeds are so much faster now too.
What I don't understand is why don't more people just order games or game accessories online and those things are so expensive that they usually come with free shipping, because the price goes over the free shipping minimum, and they could do that for all stores: Amazon, BestBuy, Target, Walmart and those places might have other, add-ons they may want that aren't exclusively game related like toilet paper or dumbbells or coffee. They can shop on their iPhone while they're on the toilet, i.e. it's way more convenient.
Value Adventurer profile picture
@icelandic_mushroom_farmer Agreed, people certainly can order online, and I believe GameStop will continue to get a piece of this market as well. The main advantage GameStop has is the breadth of options, as it is likely to have some games in stock that the other retailers stopped selling. For a title at release date, unless there are pre-order bonuses, someone not in the rewards program is not particularly incentivized to shop at GameStop.
John Miller profile picture
Nice well-reasoned article.

"As more and more games have post-game content through DLC, one should definitely be careful not to construe the trend as more people substituting purchases of physical copies of base games for digital ones."

Yes, but they are substituting gaming dollars to buy digital loot like dlc, subscriptions, and cosmetics rather than full games.

Also, there are half as many base games titles than 6 years ago. And each base game is played longer and has more dlc subscriptions and cosmetics.

The digital content pie is growing but the base game pie is shrinking and worse, more of it is sold via download - 5% more each year.

There is no longer a long tail of single-player campaign-style games ready for resale like last year's Star Wars game. Everything is more like Splatoon, games that are held for the multiplayer. GameStop's cash cow is reselling the big developers' content when they had no development costs. Big money and big margins. The developers are working each day to bring those gaming dollars home through digital purchases. Like the one ring, they are ever yearning for it.

Ok on the fundamentals, they have 20 million net cash. Free cash flow last year was negative 100's of millions of dollars. Inventory gains are not duplicatable. Liquidity sits on a knives edge. Why else should you be selling your property and accepting higher costs?
Good point, Rockstar's been milking the micro transactions in GTA 5 Online for the past decade. Instead of coming out with more games, all they're doing is getting more people to spend money in that one game.
John, in the next 1-2 years would you expect the industry sales of hardware and software to increase or decrease with the new console cycle?

Do you think there is any chance people in the last year may be holding off purchasing consoles until the new hardware comes out, and also do you think this may have negatively impacted GME last year?

Do you think some software developers may also be spending more time developing games for the new hardware rather than publishing more games for the current generation, and also do you think this may have negatively impacted GME last year?

Do you have any insights into the sorts of margins other store retailers are making from video gaming compared to GME, the reason I ask is that I wonder whether these competitors are running this segment of the business hoping to remove GME from the competitive landscape before the new console cycle and argue for greater stock from Sony and Microsoft?
John Miller profile picture

expect hardware and software increases, yet the number of titles to decrease

a meaningful number of people likely putoff a console purchase the last year in anticipation of the new cycle.... affecting GameStop

how the console cycle affects developers is very nuanced and likely less impactful than other things on GameStop

I believe discounting is primarily driven by the OEM not the retailer (i could be wrong about this) --- GameStop has better margins on the combined hardware category because pre-owned is relatively high margin

this cycle the lowered credit rating may affect hardware allotment (i could be wrong about this)
"A small point I do want to mention regarding GameStop's clientele is that many may be forced to patronize GameStop specifically because it has a physical presence."

My thinking is similar, there will be a segments of the gaming population that will prefer physical over digital for several reasons. Either due to be under banked or being collectors (as you mentioned).

The main questions are

1) Are those segments financially viable to service?
2) Can Gamestop survive the downsizing process to service those segments?
3) What is the value of Gamestop if it services those segements?
& Finally
4) Will the gaming industry continue to service those segments?
Value Adventurer profile picture
@Puzzman Thanks for the thoughtful questions.

1) I see GameStop in such segments serving as a specialized Pawn shop that also sells new goods. High populations in the area could offset the lower purchasing power of those customers, and lower income would also incentivize trade-ins to earn credit for new games.
2) Only time will tell but I would not be bullish if I did not believe it would survive.
3) A valuation wouldn't be warranted on this observation alone but is more a possible catalyst for increased sales in the rest of the year, as stores open up again and these customers are able to be sold to.
4) Games are some of the best values for the money that you can buy. Even at the full price of $60 and at a conservative playtime of 30 hours, games are a far better value than going to the movies. Given this, I don't see why the industry will not aim to reach the largest audience possible.
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