Why GameStop Stock Investors Probably Won’t Win the Game
GameStop (NYSE:GME) decided to give up on the potentially lucrative consumer electronics/technology e-commerce market prematurely, while the sales of its brick-and-mortar stores will probably drop going forward. Moreover, after the interactions that GameStop Chairman Ryan Cohen had with Bed Bath & Beyond (NASDAQ:BBBY) over the last year, I’m not very optimistic about his management skills or his ability to identify strong businesses. Given all of these points, I advise all investors to sell their GME stock, despite its current reasonable valuation. (The shares currently have a trailing price-sales ratio of just 1.15x).
| GME | GameStop | $19.29 |
GameStop Gave Up Prematurely on E-Commerce
I have long believed that GameStop could find a profitable niche in consumer electronics/technology e-commerce. My reasoning was based on my belief that no major companies appear to have forcefully sought to dominate the space or taken major steps to gain market share within it.
Indeed, neither Amazon (NASDAQ:AMZN) nor Best Buy (NYSE:BBY) has looked to portray itself as the main destination for consumers seeking to buy technology and/or consumer electronics products online. And no other major brick-and-mortar retailer has launched a major effort to become the “go-to” destination for these shoppers.
Validating my theory on the attractiveness of the niche, NewEgg (NASDAQ:NEGG), a relatively small company that focuses on technology e-commerce, generated fairly strong financial results before and during the pandemic.
For example, in 2019, the company’s EBITDA, excluding some items, came in at $1.25 million, while it generated EBIT of $33 million and $31 million in 2020 and 2021. Given GameStop’s far greater name recognition and disposable cash that it could spend on marketing than NEGG, I believe that it could, over the longer term, generate much higher profits than NewEgg.
But GameStop, after spending little more than a year on developing its e-commerce business, has largely abandoned the effort. It took that step because, in the first 11+ months of last year, the company’s e-commerce revenue had dropped by over 50% year-over-year.
However, as the pandemic wound down, consumers started shifting their spending to experiences over goods, making it a poor time for GameStop to determine the attractiveness of launching an e-commerce business.
Moreover, during that period, GME spent a meaningful amount of its marketing firepower promoting products like NFTs and cryptos, which many other firms were touting. But the popularity of those products, in my view, was always destined to fade greatly because they were classic “fads” that had been produced by a bubble. In the end, my view of those products proved to be correct.
GameStop’s Brick-and-Mortar Sales Will Probably Not Increase Significantly
In an April 19 article, another InvestorPlace columnist, Thomas Niel, theorized that because GameStop is focusing on selling video games in brick-and-mortar stores, it’s poised to become “the next Blockbuster.” Noting that “physical console games [are changing into] an increasingly niche product,” Niel warned that “GameStop is in a similar battle against time as Blockbuster was in the 2000s.”
That theory appears to have some validity, as, according to Ars Technica, 2,182 new video games were released digitally in 2021, and only 226 were launched in a physical format. Although more physical games may be released now that the pandemic is over, it’s clear that the vast majority of games are being released digitally.
As a result, although GameStop may prevent a huge sales decline over the next few years with its current strategy of selling many used games and physical collectibles that appeal to gamers, its top and bottom lines are likely to trend steadily downward in the coming quarters and years.
Some may point out that GME managed to generate a small profit in the fourth quarter. But as has been widely noted, the company managed to enter the black only through cost cutting. And as the old but true saying goes, “You can’t cut your way to profitability.”
Cohen’s Poor Stock Picking and Management Record
Also making me pessimistic about GME stock is the fact that Cohen made bullish bets on Bed Bath & Beyond, including taking a 9.8% stake in the name. Although Cohen first realized profits on the stock due to its meme status and then later avoided big losses using an ethically dubious maneuver, many investors lost a great deal of money on the shares. And the fact that he invested so much money in such a poor business makes me question his judgment.
Further, Cohen appointed three people to BBBY’s board in March 2022, but obviously, their input failed to prevent the retailer’s untimely demise. And certainly, Cohen could have and should have provided ideas to BBBY, either directly or through the board members whom he appointed.
As a result of all of these points, I’m not convinced that Cohen knows what he’s doing when it comes to managing retailers.
On the date of publication, Larry Ramer did not hold (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.
