Investors who were lucky enough to get in on the meme stock frenzy early on most likely made astronomical gains on GameStop (GME, Financial) stock. However, even though the stock managed to gain a whopping 700% by the end of 2021, the price has declined by more than 50% since January.
What’s important to note is the fact that last year's rally was not the result of improving business fundamentals. As a matter of fact, the game retailer has continued to book massive losses. For some time now, the company’s future prospects have appeared bleak with no signs to indicate that it can turn its fortunes around in the near term.
As such, there has been no shortage of GameStop bears, with all of them offering a myriad of reasons as to why investors should steer clear of the company’s stock.
The first reason is the fact that GameStop still operates a significant number of brick-and-mortar stores while its clients have been increasingly moving their spending to e-commerce channels. Although GameStop has a website, the expenses generated by its thousands of brick-and-mortar stores has continued to weigh on its operating performance.
In addition to this, GameStop's business model, which is based on selling actual physical copies of games, has become outdated. Video games for PCs and consoles have become readily available for download, so if customers have a choice of driving or walking to the closest GameStop or another video game retailer to buy a copy of a game or downloading it and starting to play in just a couple of minutes, then the decision is a no brainer. And this convenience advantage is unlikely to change going forward.
Consequently, the combination of these two reasons has resulted in GameStop's revenue declining at a compounded annual rate of roughly 6% over the past decade.
Now add in the Covid-19 pandemic, which has contributed to a further decline in the number of customers visiting GameStop’s brick-and-mortar retail stores as well as new competition from the likes of Amazon (AMZN, Financial) and Netflix (NFLX, Financial). Amazon Prime recently began offering access to games and add-ins every month for customers and has been steadily expanding its presence in the gaming industry not only in the U.S. but also in Europe.
Meanwhile, rent and lease payments are due every month regardless of how many customers are visiting the stores. Taking all these factors into account, it becomes easy to see why the company is struggling and why it needs to make critical changes to its business model.
Luckily , the company has already announced what is likely to be a transformational move for the company after it revealed that it would be venturing into the exponentially growing NFT market.
But before going into the nitty gritty details of just how this move could transform the company’s fortunes, let's look at how the company performed in its most recent quarter.
Q3 highlights
GameStop’s Q3 2021 earnings results were a mixed bag. Net sales increased 29.1% to just under $1.3 billion compared to just over $1 billion during the same period in 2020. The company still reported a net loss of $105.4 million, or $1.39 per diluted share, compared to a net loss of $18.8 million, or $0.29 per diluted share, in the prior-year quarter.
It ended the quarter with cash and cash equivalents of over $1.4 billion, roughly $1 billion higher than the end of the third quarter last year. “We continue to maintain a sizable cash position, even while front-loading investments in inventory to meet heightened demand and mitigate the full impact of global supply chain issues,” said CEO Ryan Cohen.
Additionally, the company further strengthened its financial position by securing a new $500 million ABL facility. But perhaps the most important takeaway from the earnings call was the fact that the company revealed that it had also been exploring emerging opportunities in blockchain, NFTs and Web 3.0 gaming.
Expansion into NFTs
GameStop’s stock immediately popped with the announcement that it would be looking to get into NFTs. NFTs emerged as the hottest commodity in the crypto universe last year as prices for some digital collectibles skyrocketed into the millions of dollars and celebrities and athletes further fueled the hype by jumping into the asset class.
To illustrate how lucrative the NFT market opportunity is, consider this. The largest market for NFTs, OpenSea, was valued at $13.3 billion during its latest fundraising round at the beginning of the year. The marketplace witnessed an explosion in sales last year, as monthly volumes peaked at $3.4 billion in August, up from $96.7 million in February, according to Dune Analytics. The company makes money by taking a 2.5% cut of every transaction.
Evidently, GameStop wasn’t planning on wasting any time before getting into this new market. The Wall Street Journal reported that GameStop had already made solid plans to enter the space by hiring over 20 people to run a business around NFTs, which would include the development of a marketplace service. The launch of this platform could happen later in 2022, according to insiders.
GameStop’s new leadership team, with Cohen as its chairman, has for months been preparing to take the company to the next level by changing the business’ model of relying too much on retail sales, so getting a foothold in the growing Web 3.0 environment through an NFT marketplace could be the perfect solution.
Since lack of a decent online presence has been GameStop’s major weakness, contributing to the company’s weak performance over the years, an NFT marketplace could generate the much needed hype to boost its online presence. For context, all that the company had was its own website where people ordered either gaming hardware or software and later received it in their nearest GameStop store.
While changing its business model may appear to be a risky undertaking at first glance, GameStop has enough resources to expand its horizons and enter this new and fast-growing digital assets industry, and the trends seem to be aligned in its favor.
According to a recent survey of 300 companies from 56 countries by the Blockchain Gaming Association (BGA), 86% believe at least some of the traditional gaming industry will leverage blockchain within two years.
According to Tokyo-based games industry analyst Serkan Toto, “The market loves the decision, the struggling company has bought some time by dangling NFTs in front of investors. However, I am very skeptical if GameStop can make it on its own. The company definitely needs partners to compete with the likes of OpenSea and get video game companies to cooperate.”
A number of other game developers and publishers have also expressed their interest in NFTs with the likes of EA sports asserting that blockchain based games and play-to-earn are likely to be the future of the industry.
With Sky Mavis’ Axie Infinity dominating blockchain gaming NFT trading volume and becoming the first game to surpass $1 billion in NFT sales (now over $3.6 billion) and surpassing sales records of NBA Top Shot and CryptoPunks it's easy to see why this trend is likely to continue gathering momentum going forward.
As such, companies like Krafton Inc. (best known for its blockbuster battle royale game PlayerUnknown Battlegrounds) and Good Gamer Entertainment Inc. just announced they would be developing and working with Fork Gaming to launch new titles utilizing NFTs in the first quarter of the year. The Chosen Ones’ Legendary Hero NFTs will feature a series of collectibles with 10,000 characters each with unique traits and abilities with the first series featuring four heroes that can be used in the metaverse and in a future play-to-earn (P2E) blockchain game.
While January 2022 continues to be rough for crypto investors as the current market experiences increased volatility in bitcoin and other cryptocurrencies attributed to recent federal intentions to introduce new hikes, NFT trading and blockchain games seem to have resisted the dip.
According to reports from DappRadar, NFT transactions continued to increase amid declining crypto prices with the report also showing that the money generated by NFT trading went from $10.7 billion in Q3 2021 to $11.9 billion in the first 10 days of 2022. This clearly illustrates the resiliency of this market and why it should be a great bet for GameStop going forward.
Takeaway
I believe GameStop appears to be attractively priced at the current level due to its intentions to enter into the NFT market, but to ensure the long-term growth of the stock, the company’s management needs to actually make progress on executing its new strategy of capitalizing on the NFT market and the metaverse.
