GameStop - GME

In early April GameStop released their earnings from Q4 2018 and fiscal 2018. Spoiler alert: things do not look good. This is not much of a surprise as the company has been on a downward trend now for a while. The stocks last high of $46 was in November of 2015. Since then it has been a gradual decline to the under $10 per share price that it currently goes for today. Things seemed to have gotten very dire in the last few months as the stock has been down around 40% since January. There was rumour of a sale which fell through, which hurt the value because a lot of investors thought new management might be able to save them or possible make a profit by liquidating all of the assets. We are also coming to the end of a console cycle which hurts because people don’t need to purchase hardware this close to the end of the cycle. This also hurts gaming sales as most developers are now planning games for the launch of the next generation which leads to less game releases.

The results weren’t good but according to CFO Rob Lloyd “We are pleased to have delivered fiscal 2018 within our adjusted guidance range”. They also went on to say that they are aware the challenges that are facing the preowned game business and plan to evolve going forward. Its good to hear that the company understands the dire straits they are in and have an awareness about it.

Brass Tacks

Highlights from the report included that hardware sales were down almost two percent overall with Switch sales being up. This makes sense as the Nintendo Switch is still a relatively young console. New software sales decreased almost five percent and even worse news for the company was that preowned sales decreased around thirteen percent. Having preowned sales down double digits is a real sore spot as this is how GameStop has made it bread and butter over the years. The decrease seems to be a combination of less games coming out at the end of a generation cycle as well as more games becoming services and always updating like Destiny, The Division and many more. This leads to a lot less trade-ins as people keep the game for a lot longer. A huge bright spot for the company was that accessories were up twenty two percent, which was driven by headset and controller sales. Gamers are growing up, getting more disposable income and wanting a premium headset and controller experience. Some analysts have voiced their concerns about premium headsets and controllers being a result of the Battle Royale explosion. The concern is that many gamers playing Fortnite, PUBG and Apex desired to have that extra edge but once these games fizzle out the market will dry up. This is a major concern levied upon companies that rely solely on accessions such as Turtle Beach and Logitech, parent company of Astro. I think the more gamers grow up and the culture continues to seamlessly blend with mainstream, premium accessories will continue to sell. Its great for GameStop that they were up but I don’t think full focus in this specific area would pay off long term as online retailers such as Amazon have the same wide offerings and are only getting more options and faster shipping with many options available same day.

Gamestop lost 700 million in Q4 alone which is crazy considering they also sold their mobile arm, Spring Mobile a few months back for 700 million. If not for the sale of Spring mobile it would have been a loss over one billion dollars. One of the lone bright spots in the earnings report was that total sales were over 8 billion dollars. This is clearly a company that understands how to move product. Since the increase in digital sales the company has tried to venture out and diversify. A few of these methods have worked out over the years including the increase in accessories mentioned before which increased twenty two percent year on year and the collectibles which increased eleven percent for a total of 707.5 million and that is a lot of funko pops. The mobile venture didn’t prove to be as fruitful as the probably would have hoped and it probably tied up a lot of cash flow but they were able to sell Spring mobile for a good amount. It is unclear if they made a profit on that venture as it was never disclosed how much it was acquired for.

The end is nigh but not super nigh

What can the worlds largest video game retailer do to possibly stay relevant as a retail dinosaur at the brink of the digital ice age. It won’t be overnight because I don’t see their demise coming for at least a few years. I forsee the company being able to stay afloat at least until the next generation of consoles launches which would help bolster the companies bottom line. There are a lot of places you can purchase your gaming hardware nowadays from Target to Walmart and Amazon to name a few but many people will prefer to purchase from GameStop. After that many developers are reporting every year their digital sales increase which is great news for them as they don’t have to pay retailers a large chunk of the profits. We live in an age of convienience, so it becomes much easier if you don’t have to leave the house to purchase the new game you want or if you want to buy the game at midnight. I am not sure what the future looks like for GameStop but with less reliance on physical media and hardware possibly becoming obsolete it will be interesting to see how things shake up for this Fortune 500 company going forward.

Bright Side

Without being an expert on the stock market I can look at trends and patterns and make an educated guess. As we are on the precipice of a new console generation we can take a look back at GameStop and how the launch of the PS4 and Xbox One X affected their stock. Prior to official announcements of the aforementioned consoles GameStop had a share price not too different from what it currently is today. In July of 2012, GameStop was trading for around $15 dollars a share. Between that summer and the launch of the major consoles in the fall of 2013 GameStop saw its shares climb continually to a little over $56 and remained in the $40 range for a few years after. Once console sales had slowed and retail sales transitioned to digital sales is when their stock price went on the downward spiral. As most people were expecting the first news of new consoles to be revealed at E3 but Christmas came early in the form a of wired magazine interview. Wired sat down with lead system architect, Mark Cerny to talk about some of the features and specs of the upcoming PS5. One of the main reasons I mention that here is because they mentioned that it would be including a optical disc drive. There has been a lot of talk up to this point of how the next generation would look and mainly if it would need physical media or if the future was going to be all Digital. With GameStop currently trading under $9 dollars a share the risk is there but where else are you going to buy your new console when you want it on Day 1.

Another huge benefit to GameStop stock is how high their dividend is. GameStop currently has a stock dividend of around fifteen percent which is insanely high for the stock market. The average stock dividend is around two percent. Most companies dont even offer dividends. A crash course in case you dont know is that the percentage, in this case 15%, of profit that is repaid out to the shareholders. Last time Gamestop paid out $0.38 cents a share back to shareholders. That kind of money can add up quickly the more shares you own.

The other way GameStop is trying to stay relevant is to get behind Esports in multiple ways. According to a press release from March 27 GameStop outlined how they plan to get behind Esports in a big way. One way they plan to get behind Esports is the most basic and that is to sponsor events and teams. They announced a partnership with complexity gaming, one of Americas biggest Esports organizations. According to the article they partnered up to be the title sponsor of the teams state of the art facility in Texas. “This is a move to engage in the Esports arena to help bring video game culture and experiences to life”

GameStop also announced how it plans to get in at the grassroots level and become the pop Warner of Esports. This includes gaming clinics where amateurs can learn from some of the best the sport has to offer. Esports watch parties, Collegiate league and tournaments.

Dearly Departed

One of the most basic principles of investing has always been buy low and sell high. The problem here is that you never really know where the bottom is. However, with E3 just around the corner I feel that this stock is about to start its slow climb upwards. Based on the last generation of console releases we are in very similar territory and we saw what happened last time where the spikes started at the announcements, went upwards until release and remained decently high for two years post console release then began the descent. I don’t know where GameStop will be in ten years but there could still be some opportunity left with this stock.