Investors Need To See More Than Just Good Enough From GameStop

GameStop (NYSE: GME) will report its 2020 second-quarter earnings on September 9, 2020 after the market closes.

In a parallel universe, there may be things to get excited about for GME stock investors. The stock is up 22% for the year and nearly 175% since falling to a low of $2.80 in April. In fact, the stock is up 53% since August 21. Normally a run like this prior to earnings suggests that analysts are expecting a good earnings report.

But the problem for me is that GameStop isn’t a new company. It’s been publicly traded for a long time. And back in 2015, the stock was selling for around $45 per share. GME shares have been on a slow, steady decline since that time. And not without reason.

The gaming industry has changed.  GameStop made its business on gamers having a need to have the physical gaming discs in their position. My son bought the online version of Madden 21 weeks before it was released. There’s simply little reason for customers to go inside the store anymore.

And the company has increased its online sales. In the last quarter, the company saw a gain of over 500%. But it still wasn’t enough to prevent these grisly numbers:

• Quarterly revenue that was 34.2% lower on a year-over-year (YoY) basis.
• An operating loss of $108 million. In the same quarter in 2019 the company had $17.5 million of operating income.
• A net loss of $165.7 million which was in stark contrast to the $6.8 million it had brought in during the same quarter the prior year.

It’s impossible to ignore the fact that GameStop represents a business model that doesn’t exist anymore. Like the video stores of the 1980s and 1990s, digital has claimed another victim. GameStop has to know this. The only question is how long do they plan on hanging on?

Will History Repeat Itself and Does it Matter?

The last year that Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) released consoles at the same time, was 2013. At that time, GME stock doubled. The company is hoping to catch lightning in a bottle again as anxious holiday shoppers will be on the hunt.

I suppose if I was an investor, this might give me a little bit of hope. And if I’ve been a long-term investor (are there any), it would give me one last gasp at recouping some losses. But in a quote attributed to Mark Twain, history doesn’t repeat itself, but it frequently rhymes.

2013 didn’t serve to give GameStop a sustainable bounce. And I can’t imagine it will be any different in 2020.

Even Robinhood Investors Are Staying Away

In 2020, whenever I see price movement like we’ve been seeing with GME stock, I immediately look to Robinhood. There’s nothing wrong with this new way to trade. In fact, if it brings more investors into the market that’s a good thing in the long term. But in the short term, there are a disproportionate amount of low-priced stocks that are being bought with the intention of making a quick trade.

But even these investors are staying away from GME stock. And in that neglect may lay the biggest indictment of the stock. This was the generation that grew up on GameStop, but it’s likely that they see the writing on the wall.

The Bottom Line on GameStop

The company looks like a company that’s trying to hang on. And if it can grow a little along the way, that’s fine. But more importantly, GameStop doesn’t appear to have a clear plan for how growth would occur. It has made strides to embrace e-sports. But the model seems to rely on drawing gaming enthusiasts to the store to watch events. I can’t see this generation of games doing that. Not in a million years.

But no sooner had the company said that, when it announced a plan to “de-densify” which involved closing approximately 200 stores. And aside from that measure, GameStop eliminated its dividend and initiated a share buyback program. All of those measures are indicative of a company that’s just trying to hang on.

The new gaming consoles that still include a disk drive should allow the company to see things through to another year. But the better question that has to be asked is why should investors get on that ride with them?