The use of video games is growing to record highs, enriching game developers and console makers and boosting sales of e-commerce platforms. Practically the only part of the industry that has not benefited is physical retail chains like GameStop, which still rely on physical sales in a world in rapid transition to digital transactions.
So far. GameStop’s stock is skyrocketing to comic levels as part of a continuing frenzy orchestrated by small investors on Reddit and TikTok. As a way to get revenge on the hedge funds that profited from GameStop’s steadily declining business, these investors came together to buy the company’s shares and increase their value. This created a “short-term squeeze”, forcing the hedge funds that had sold GameStop shares to buy more and more shares to cover their losses – sending the shares, as these watchful investors called them, “to the moon”.
The stock price hit a high of $ 483 this morning, an immeasurable increase of 12,000% from the price of $ 4 at the same time a year ago. Since then, it has fluctuated wildly when Robinhood and other stock trading platforms blocked investors’ ability to buy GameStop shares, but the value remains much higher than what GameStop’s underlying finances suggest it should be.
All of this was only possible because many of GameStop’s affluent investors were so certain that the business was bound to collapse that they bet billions on its demise. And, until recently, that was a very smart bet.
The GameStop story
Founded in 1984 as a software retailer, GameStop transitioned to games in the early 2000s and was extremely successful, selling consoles, games and accessories to consumers. At its peak, around 2011, the company was generating almost $ 10 billion in revenue a year and had 6,700 stores. But in 2019, GameStop generated just $ 6.4 billion in revenue (pdf). Well before the coronavirus pandemic, he laid off hundreds of employees and plans to close more than 1,000 stores in an effort to cut costs.
That’s because video games are increasingly bought and sold online, rather than in stores. Players can download – or even stream – games to their consoles and PCs without the need to purchase physical discs. The growing popularity of games for mobile and cloud devices has made the previously necessary trip to the store obsolete. GameStop is the Video Game Blockbuster – a relic of old consumer habits that barely survive in a digital world.
While digital sales also include content in addition to the games themselves, such as add-ons and in-game currency, games are increasingly being purchased digitally. Both Sony’s PlayStation 5 and Microsoft’s next-generation console offer digital editions, which don’t even come with a disk drive. Sony said this year that over half of the video game units sold in 2020 were digital.
Some users of the WallStreetBets subreddit argued last year that GameStop’s shares were in fact undervalued. Game consumption increased because of the pandemic, and while PlayStation and Microsoft were about to launch new consoles with only digital options, GameStop was still struggling to make a profit on sales of those consoles. Both factors made GameStop’s situation a little less dire than hedge funds’ position suggested – at least in the short term.
Similar thinking led activist investor Ryan Cohen to invest heavily in the company in 2020, hoping to influence his board to consider a new digital direction for the company. “GameStop needs to evolve into a technology company that delights gamers and offers exceptional digital experiences – not to remain a video game retailer that prioritizes its physical presence and stumbles into the online ecosystem,” he wrote in a document to the SEC in November.
So there may still be some hope for GameStop, even after this madness is over. Her next steps are unclear: she could use the company’s temporarily exaggerated value to pay off outstanding debts and invest in new initiatives. Or you can go back to normal. But this business was more and more relevant.