Full Stop on GameStop

I think Gamestop is a crappy, defunct company that I wouldn’t touch with a 30 ft pole.

Ripped that off quickly, now let me explain why.

Gamestop has a business model predicated on a time long ago, where physical media mattered. The fact is, in 2021, gaming no longer requires physical media and frankly, physical media likely slows down the ability for game systems to compute. As gaming systems and games become ever more sophisticated, the shift to digital goes from convenience to outright necessity, not just for the information a game has, but a regular stream of information and ability for developers to patch and expand more readily their games. Gamestop’s revenues reflect this trend, posting static revenues and losses, large losses, losses only curbed in the last several years by store closures and cost cutting. 

This brings a bifurcated problem. Gamestop will continue to move to a small footprint strategy, less stores and whatnot. Perhaps in another few years that turns losses into some amount of gain, if nothing changes. Problem is, things are changing – there is increased sales and pressure from Amazon, Walmart, Target, and Best Buy with respect to selling retail games when they come out, and a generation of gamer is growing up that downloaded everything. Moreover, that new generation of gamer is all about mobile games – PC and console games are dwarfed with respect to revenues by mobile gaming, which Gamestop has little to no ability to make money on. Moreover, for other platforms, the consoles themselves and/or platforms like Steam already have library systems and storefronts for publishers, offering terrific advertising and large discounts because they have no physical inventory they need to maintain. There’s no inventory risk or shrinkage loss concerns if you’re Steam or the App Store; Gamestop constantly has had to fight this uphill battle. So this whole narrative and idea that Gamestop will revitalize its business by pushing an online platform – I hate to break it to the world, but you’re a decade late to that party. Gamestop actually tried to do such with its Kongregate platform, which did have some intriguing elements when it was releasing indie games not on the other platforms a decade ago. They all but gave up on that, failing to compete with the major consoles/iOS/Google Store and Steam in attracting/marketing that talent. 

If the idea is “exclusive non-gaming figures/accessories,” Crunchyroll (owned by Sony) and Bandai (owned by Bandai Namco) have their own storefronts, streaming platform (Crunchyroll), or are going direct to consumer (Bandai) with these offerings. Gamestop had another opportunity years ago when it acquired Thinkgeek . . . and then they abandoned it, leaving it to wither on the vine. Sound familiar? 

Then I look at their balance sheet. Total assets are down 12.3%, with bank notes paid only because they were able to sell shares to meme traders, who were willing to gobble the things up at insane valuations. Tangible book value is down 32.7% from a year prior, and I’m just not seeing what exactly they are allegedly “transforming” here. Nor are they communicating such – the last two quarters, the analyst calls have amounted to announcing lousy financial results, then promptly ending the call without taking analyst questions or providing any sense of trajectory. No changes to the website. No changes in the retail stores they still have. No changes in marketing or positioning or promotion or – anything. I feel like I am watching a game of inventory shifting and money changing buckets, without meaningful increases in value or growth being achieved – the equivalent of a bishop being moved back and forth in a game of chess, hoping to hell that the opponent either offers a draw or concedes out of boredom.

And then finally there is reputation. This company is, has been, and continues to have a miserable reputation among a good chunk of the gaming population – that chunk now being parental age. When the running line for your company regarding any headline is “You just bought that copy of Madden from us for $60 . . . I’ll give you $2.25 in trade or $1.71 in cash,” I mean, this alleged turnaround story can’t just be about all the points I raised. It also has to be about turning around how a company that frankly ripped people off for decades somehow sheds that image. Pulling stunts like providing little to no concrete details and not taking analyst questions on the latest earnings call, these are not behaviors that strike any amount of confidence. 

At the end of the day, I don’t believe this company has a compelling means of growth. Maybe they can pivot and somehow survive on used game sales in the short or medium term, but I do not see given how both publishers and platforms want a bigger piece of the pie, why Gamestop would ever fit that equation, because Gamestop really can’t sell more of their product than they can themselves. In FY 2017, the company did $3.50 billion in Q4 sales. In FY 2018, $3.1 billion. In FY 2019, they wouldn’t even state their earnings directly in the CEO comments, burying the miserable net sales number of $2.194 billion on the balance sheet for you to hunt and find. And in the midst of a pandemic, with Activision Blizzard blowing out earnings, with Apple and the App store blowing out earnings in high double digits, with everyone at home because they literally can’t do anything else, and the best Gamestop could do was “meh,” it doesn’t give me any degree of confidence in this transformation they’ve been selling for years. And if given the option between holding $GME and whatever its fortunes might be, or holding $AAPL and $ATVI with amazing franchises and platforms, fantastic balance sheets with best-in-class CEO’s and cash flow and great decade+ long track records of success, there’s no way I can justify putting $1 on $GME. 

What I see in Gamestop is a company that will talk transformation while spending 5 years unwinding itself into either bankruptcy or sale to another company. If they turn it around somehow, good for them. If you do great on the position, good for you – I wish you well on it and I hold no grudge whatsoever. It isn’t a contest to me. But in my opinion, this company is a dumpster fire with little to no hope for actually becoming a meaningful business again. Putting your money here feels like a massive “GAME OVER” to me.

Note: Briggs Financial Inc. holds no position in $GME and per firm policy does not short any company. Briggs Financial Inc. does have long positions in $AAPL and $ATVI.

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