The Videogame Industry Has Passed GameStop By

Videogame retailer GameStop (NYSE:GME) has been one of the most heavily-covered stocks this year. Fueled by Reddit’s short squeeze, GME stock turned into a “meme stock”. However, the short interest has now largely evaporated, and it’s time for it to prove its mettle.  Its push towards an eCommerce model requires a multi-faceted approach, which appears unlikely at this point.

GME stock has been one of the most shorted stocks in history, going from $17 at the beginning of the year to $483 in February. As a result, the stock’s momentum has slowed down considerably in the past couple of months.

Ryan Cohen, the co-founder of animal products eCommerce giant Chewy (NYSE:CHWY), is spearheading the business’ transformation towards eCommerce titan. The company has done well control its debt, but it will need massive capital investments to sustain its eCommerce endeavors.

Moreover, even upon successful execution, it faces immense competition from first and third-party developers looking to cut out the middle-man and expand their margins. With that being said, let’s look at the myriad of challenges GameStop currently faces.

The Rise Of Ecommerce In Gaming

The delivery of video games to consumers is vastly different from the past. Now video games can be downloaded with a click of a button, and fast internet speeds mean that they can be downloaded within few minutes. Hence, these secular changes have crippled GameStop’s business model, mainly reliant on brick-and-mortar sales.

GameStop plans to streamline its business by closing down stores and allocating resources to optimize its product footprint. Moreover, to flesh out the logistics, it has leased a 700,000 square-foot facility which should serve as a fulfillment center.

Moreover, there is also a considerable risk to margins, as freight expenses and logistics, along with online payment processing fees, will heavily weigh in on the company’s gross margins. That doesn’t mean it can’t compete in the market, though. Offering perks and privileges while using data analytics, search engine optimization, social media and other elements could give GameStop an edge.

GME Stock: Brand Image

One of the major question marks surrounding GameStop at this time is branding. It’s made famous the term meme stock, which describes a stock that has shot up in value mainly due to social media rather than its fundamentals.

However, even before that, the online community made fun of its “low-ball” offers on trade-ins. In addition, it has often tied its inventory of consoles to expansive bundles, which usually contain unwanted accessories.

In recognizing the need for change, GameStop is investing heavily in optimizing its supply chains, streamlining operating models, improving fulfillment capabilities, and recruiting new talent. At the conclusion of April, it had raised $551 million through an at-the-market offering to expand its digital sales base. As its transformation continues, expect more capital raises and at-the-market offerings.

The Bottom Line on GME Stock

GME Stock has been on a roller-coaster ride since the start of the year and remains one of the more talked about investments in the market. Now that the smokescreen has blown away with the short squeeze, the focus is on the stock’s fundamentals.

CEO Ryan Cohen’s push for a predominant eCommerce model for the company is imperative at this time. However, its execution especially considering the dynamics of the gaming industry is another story. I feel it’s a rocky road ahead for GameStop in its attempt to breathe new life into its business.  Therefore, avoid GME stock at these levels.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.