Why GameStop Is a Bad Bet

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

2013 was a dramatic year for GameStop (NYSE: GME  ) . Sluggish numbers from the preceding holiday season mixed with the rising threat of digital distribution, and rumors that new consoles from Sony (NYSE: SNE  ) and Microsoft (NASDAQ: MSFT  ) would introduce technology to block used games, were causes for the pessimistic outlook. After a pricing recovery, news that the Microsoft's Xbox One would actually implement such features prompted a sell-off. The hardware manufacturer's later reversal and decision not to clamp down on the pre-owned market prompted more bullish takes on the gaming retailer.

The successful North American launches of the PlayStation 4 and Xbox One have helped GameStop double year over year. But are the numbers and data driving the pricing swell misinterpreted? Is GameStop a sound investment or a leaky ship?

It's all about software
The November 2013 tracking estimates from NPD Group arrived bearing numbers that are both superficially reassuring and troubling. Overall retail sales rose 7% year over year on the strength of the new console debuts. Hardware sales were up 58%, aided by a strong performance from the Nintendo (NASDAQOTH: NTDOY  ) 3DS. This made for the best November hardware sales on record.

At the same time, software sales were down 24%, which is bad considering 2012's November software sales declined 11% compared to the previous year. It's obvious that the new consoles sucked money away from software, but there is also evidence of franchise fatigue and doubt as to whether the new IPs in the pipeline are capable of carrying the torch.

Everyone knows that digital distribution is coming, albeit hindered by increasing file sizes and bandwidth caps. What is not presently understood is how the software breakdown of this generation will differ from the past.

Pop goes a bubble
The collapse of mid-tier games and subsequent concentration of  efforts on AAA goes hand in hand with the death of Nintendo's Wii U. Last generation saw the Wii sell 100 million consoles worldwide and act as a haven for family and budget titles. Most of the casual gamers that Wii brought in are being absorbed by mobile or have lapsed altogether, leaving only the Nintendo faithful to drive software sales on the company's new console.

The Wii was a huge part of the industry growth that occurred during the last cycle. The lack of a comparable successor will surely be felt by GameStop.

The real growth is in other stores
The rising development costs associated with the PlayStation 4 and Xbox One, and the consolidation of studios mean that there will be fewer retail games released this cycle. The gaps between big titles will largely be filled by smaller games and indie software sold through the PlayStation Network and Xbox Live.

The PlayStation 4's lineup is already largely buoyed by PSN titles and indie games, with Xbox One set to receive its first indie games in early 2014. A look at the PS4's release slate for the first quarter of 2014 shows just how central PSN games will be to the system's success.

While games have the potential to grow in scope and stature, there will be fewer of them. What's more, these games now feature additional built-in monetization schemes that threaten to suck up the spend-pool that GameStop relies upon. $60 rarely buys all the features and content that a modern game has to offer, with publishers looking to microtransaction models and downloadable expansions that increase gross spend and product lifecycles.

GameStop currently has access to a portion of this revenue with sales of premium game editions and "season passes" for updates. But publishers are increasingly steering these dollars away from the middleman. Microsoft's initial product vision for the Xbox One may have been largely rebuked, but it is the direction in which the industry is inevitably headed.

Japan opts out
Making matters even worse for GameStop, the big Japanese publishers are in various states of disarray. Companies like Square Enix, Capcom, and Konami have stumbled with their console efforts, and are retreating to mobile with hopes of reduced costs and softer competition.

Increased strength from European developers will help pick up some of the slack, but not enough. In the coming years, GameStop's shelves may face waning variety and a narrower pitch.

The game has changed
Storage limitations and download restrictions will keep digital distribution at bay for several more years, but the new software ecosystem threatens to rattle GameStop. Casuals will get their fix through mobile offerings, while more involved gamers purchase the big game of the season, punctuated with smaller releases that the retailer will see no part of. If the latest console war produces clear winners, don't expect GameStop to be among them.

Entertainment, as we know it, is on the verge of a transformation.
The companies that prevail in this epic disruption could go on to earn their shareholders untold sums of money. And the companies that lose could very well end up in bankruptcy court within a matter of years. With this in mind, our top technology analysts created a groundbreaking free report that sorts out the likely winners from the losers. In doing so, they reveal the handful of companies that are best positioned to make their shareholders exceptionally rich over the next few decades. To download this invaluable free report before the rest of the market catches on, simply click here now.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2778127, ~/Articles/ArticleHandler.aspx, 9/25/2016 1:30:56 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:01 PM
GME $28.19 Down -0.08 -0.28%
GameStop CAPS Rating: **
MSFT $57.43 Down -0.39 -0.67%
Microsoft CAPS Rating: ****
NTDOY $33.50 Down -0.24 -0.70%
Nintendo CAPS Rating: *
SNE $33.60 Down -0.31 -0.91%
Sony CAPS Rating: ***