GameStop: how a video game chain was dragged into the war on Wall Street

Erik Riggiola, a customer at GameStop’s Union Square store in Manhattan, has little sympathy for the big investors who have been burnt by betting against the video game retailer.

The 49-year-old, who lost his job as an operations manager at a delivery company during the financial crisis, said Wall Street was getting a “taste of its own medicine”. But even Mr Riggiola had to admit that although GameStop was “not at the point of extinction”, it did look like a business that needed to adapt to keep up with the times.

Yet, in the past month, the struggling 37-year-old chain has gone from a share price that averaged around the $18 mark before the trading frenzy began, to a record intraday high of $483 on Thursday and a $28bn or so market capitalisation that exceeded Halliburton, Kellogg and about half the companies on the S&P 500. Though the stock later retreated sharply amid volatile trading.

The reason for the exuberance is, in part, the hope for a potential turnround led by new board member Ryan Cohen, co-founder of online petcare business Chewy. But a much larger factor has been a co-ordinated effort among amateur traders to bet against the short-sellers who make money by buying shares that they think will fall.

The professional investment industry has little time for the hype. The most optimistic price target on Wall Street was $33, awarded by Telsey Advisory Group. GameStop shares last year averaged about $7 and their intraday low point was $2.57 in April.

“We remain sceptical on the potential for a turnround,” said Curtis Nagle, analyst at Bank of America, who has a $10 price target and underperform rating on the stock. Mr Nagle cited “multiple structural headwinds” to the industry, particularly from online competition.

Meanwhile, GameStop’s revenues have nearly halved, from about $9.5bn in 2011 to an expected $5.3bn in the current financial year. In December, the company reported a 31 per cent fall in sales in the first nine months of 2020, compared with the previous year. Sales over the holiday period were also disappointing.

For decades, GameStop stores had been the go-to spot for gamers in malls across the US, but the chain was too slow to adapt as footfall dropped and consumers drifted away from in-store purchases towards digital downloads to their smartphones, consoles and computers. 

Attempts to diversify, including a push into the wireless business failed. In 2019 it scrapped plans to sell itself and there has been a certain amount of leadership turmoil at the very top. 

Column chart of $bn showing GameStop's declining revenues

Under pressure from investors, the group began to cut costs and close stores that were underperforming, or were in areas where there were deemed to be too many of them. From more than 7,000 stores in 14 countries in 2018, GameStop now has about 5,000 in 10 countries.

It also began to focus more on “concept stores” that offered customers the chance to try games before buying them and to compete in online leagues. But then the pandemic hit. And while demand for video games rose as people were forced to spend more time indoors, GameStop was inevitably affected as people avoided malls.

Yet investors started to take note of the changes in August last year, about the time that Mr Cohen started amassing a GameStop stake through his investment firm RC Ventures. There was also an expectation that the new PlayStation and Xbox consoles would benefit the business.

But the stock really took off earlier this month after GameStop agreed to add Mr Cohen, Alan Attal and Jim Grube — two former Chewy colleagues of Mr Cohen — to its board and the army of day traders got involved.

Now, people are left wondering what the outlook for the company is once the dust settles.

Before the pandemic, GameStop had started to focus on ‘concept stores’ that offered customers the chance to try games before buying them © Patrick T. Fallon/Bloomberg

The pessimistic camp argues it could whither away if customers move to digital downloads en masse, but others insist that customers still want physical copies of games and GameStop has a part to play here. 

“They dominate trade-ins” said Michael Pachter, analyst at Wedbush. He added that poor internet connections and widespread money worries meant that GameStop, which has a popular service that allows customers to trade in games and consoles at its stores, still has a place in the industry and “this thesis that everyone is going to download digitally is stupid”.

James Rodriguez, a 38-year old GameStop customer who still buys physical copies of games, said he had been shopping in-store more often during the pandemic because he was worried about packages being stolen and delivery delays. 

Still, the business model of video game retailers is shifting remorselessly online and towards subscriptions and free to play games that make money from in-game purchases.

“I’ve lived through what’s happened in newspapers, through what’s happened to digital music,” said Lewis Ward, industry analyst at International Data Corporation. “I’ve seen this movie before and it’s simply gaming’s turn to be digitised. The idea that this isn’t an inexorable shift, in my mind, is just not true.”

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