Shares of GameStop (NYSE: GME ) took it on the chin last week, after Best Buy (NYSE: BBY ) announced that it will allow diehard gamers to trade in used games for gift cards this summer.
Buying used games and gear at rock-bottom prices and reselling that inventory has been a high-margin endeavor at GameStop over the years. Amazon.com (Nasdaq: AMZN ) , Toys "R" Us, and Best Buy kicked around buyback models last year, but now Best Buy will make it an official practice throughout its domestic superstore chain.
GameStop's stock fell by 11% last week, thanks in part to the news. That's even more than shares of Best Buy squandered after posting uninspiring financials that fell considerably short of market expectations.
Value investors may find their tails wagging about now. GameStop is trading for just 7.3 times this year's projected profitability. Comps have been challenging given the gaming industry's dreary sales figures over the past year, but GameStop's attractive unit-level economics keep the bottom line pointing in the right direction.
Unfortunately, it's still hard to cast GameStop in the digitally delivered gaming landscape of tomorrow. OnLive -- the cloud-computing-based online game service -- officially launched last week; Microsoft (Nasdaq: MSFT ) and rival console makers continue to promote their download marketplaces.
GameStop is trying. The small-box retailer teamed up with Activision Blizzard (Nasdaq: ATVI ) to promote Legends of Zork -- a free-to-play Web browser-based game -- earlier this year. It has enough clout to negotiate store-level exclusives.
However, there's no reason to believe that GameStop's fate in moving physical software titles won't be all that different from what ultimately tripped up record stores, DVD shops, and booksellers.
GameStop's shares got whacked because Best Buy may start to nibble away at its highest-margin business, but there are evolutionary factors weighing on the chain's prospects elsewhere.
The stock is cheap, but it's cheap for a reason. The attractive store-level model can crumble quickly once the supply of used gear thins out, folks are buying digital downloads from their consoles, and hardware becomes less of a factor in a cloud-computing scenario. It may hold up OK in the near term, but this still appears to be a model on the way out.
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