GameStop (NYSE: GME) the stock is getting an extraordinary amount of attention lately. He was caught in the middle of a shopping frenzy that started in the Reddit r / WallStreetBets forum subgroup. At one point, the price of a GameStop share rose jaw-dropping 1,063% in January alone. This increase was fueled in part by some investors struggling to cover the shares they kept selling.
Although the reason for excessive purchases and sales of GameStop shares is more related to some peculiarities (potentially profitable and potentially harmful) of stock trading, fundamentally GameStop, as a company, has an undeniable advantage that can make it a valuable action to own in the long run.
Image source: Getty Images.
Hardcore gaming enthusiasts are the key
GameStop is a video game retailer with more than 5,000 locations in at least 10 countries. Having so many locations is not ideal when there is also a major shift in the video game market for ongoing digital purchases. In addition, state-of-the-art game consoles are already on the market and selling well, allowing for digital-only game versions with the intention of persuading consumers to speed up their move to digital purchases. Video game manufacturers prefer to sell them digitally, as this reduces the costs of packaging and shipping products to customers and limits the resale of these games by the initial buyer. This may partially explain why, since 2019, GameStop has been forced to close more than 800 physical locations, with plans to close another 200.
However, some of the most enthusiastic players (those who play so many hours who get tired of games quickly) prefer a physical copy. Why? That’s because when they finish playing, they can sell it or exchange it with friends – an option that is not available to them with a digital copy. To serve this audience, GameStop offers exchanges and used games for purchase. This gives hardcore players an opportunity to recover part of their video game purchase price and allows others to have the option to buy used games at discounted prices in retail versions.
At the moment, digital games are usually sold at the same retail price as their physical equivalents. For game enthusiasts, physical copying is still the best option, and therein lies the undeniable advantage that GameStop currently has. Unless game makers are willing to lower prices for digital versions or allow digital games to be used in exchange for buying new games, GameStop will continue to be a destination for game enthusiasts.
What this could mean for investors
At the very least, this continuing demand means that GameStop will not become irrelevant anytime soon. This advantage is certainly not enough to increase sales, but it can be enough to buy GameStop management time to boost your business model. After all, in the last decade, revenue has only declined at a compound annual rate of 3.3%, which is not catastrophic. Of course, the 2020 revenue for the brick and mortar retailer was much worse because of the temporary closure of stores due to the pandemic, but the launch of new gaming consoles from Sony and Microsoft helped comparable store sales increase by 4.8% over the nine-week vacation period.
Data source: Ycharts.
It is true that this advantage may not be sufficient to justify the currently high share price, which is being traded at a price / sale ratio similar to that of several FAANG shares (see graph above). In fact, it is trading at a higher P / S ratio than Amazon.
Unfortunately for GameStop shareholders, shares are falling from their high per share from around $ 350 to $ 60 at the time of this writing. Investors who want to make a prudent decision would be better off if they put their money in more proven winners.