Will GameStop's Bull Run Continue in 2021?

The Digital Transition has not Been Universally Embraced

There is a common misconception that the majority of gamers prefer to buy digital titles simply because downloading new games is convenient, high-tech, and has a cool factor to it. However, video game sales of both tangible discs/cartridges and via downloads have soared during the pandemic. A considerable percentage of gamers simply do not want to buy the digital versions of titles.

The downside to downloading a game as opposed to receiving a physical copy of it is the lack of resale value and the inability to share the game with friends. Those who opt for a tangible copy of a game can easily resell it to GME, a friend, or a stranger, recouping some of their original investment. Furthermore, tangible game discs and cartridges can be taken to friends’ homes for in-person “couch gaming” while those who download games are required to transport their entire console for such social gaming. This is precisely why GME has the potential not only to stay in business but potentially thrive.

GME by the Numbers

Even if some gamers continue to buy games, consoles, and accessories at brick-and-mortar GME stores, that fact alone does not guarantee the company’s stores will remain open. Furthermore, the continued business does not guarantee GME will meet investors’ expectations. There is a legitimate concern that GME lacks a sound business model and will eventually go out of business, succumbing to the digital shift.

When in doubt, check the POWR Ratings. GME has "C" grades in the Industry Rank, Peer Grade, and Buy & Hold Grade components along with a "B" rank in the Trade Grade component. GME is ranked 13th of 37 publicly traded companies in the Specialty Retailers space. The stock has a year-to-date price return of 155.43%, a six-month price return of 252%, and a three-month price return of 47%. However, the top analysts are bearish on GME, setting an average price target of $8.59 for the stock, meaning it has the potential to decline by nearly 45%.

Of the seven analysts who have studied GME, zero recommend buying, four recommend holding, and three advise selling. GME's most recent earnings reveal its losses were much more narrow than anticipated. GME posted a 53 cent loss per share (adjusted), which beat analysts' expectations of an 81 cent loss per share. Unfortunately, GME's bottom line worsened from the year prior when it recorded a 49 cent loss per share in the same quarter. Furthermore, GME net sales are down more than 30% on a year-over-year basis. It is quite concerning that GME has 607 fewer locations this year compared to the year prior.

Can GME Pivot to Online Sales?

When gamers buy new games, some download after paying while others shop in-person at stores. Some choose to buy online and have the game shipped directly to them. GME's brass is attempting to capture this ship-to-home market. GME's e-commerce business is gaining momentum with online sales spiking 257% every quarter. All in all, GME's e-commerce sales accounted for nearly 20% of the company's aggregate net sales in the prior quarter.

The Verdict

GME is likely to stagnate or decline following the holidays as an insufficient inventory of PlayStation 5 consoles lowers sales expectations. Though it appears the supply of Nintendo Switch consoles is finally meeting demand, GME will likely to continue closing stores in the years ahead as the masses gradually transition to digital downloads.

Even if GME completely shifts to online sales, it will become a fraction of its former self when all is said and done. The market for the sale of tangible games is inherently limited as the majority of gamers do not object to downloading titles. The bottom line is GME is in the midst of being disrupted by technological innovation. You probably shouldn’t invest in GME unless you believe the company will be acquired shortly. In fact, investors might even want to consider shorting the stock after the holiday euphoria ends.