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Why Shares of GameStop Crashed Today

By Timothy Green – Updated Apr 23, 2019 at 11:26PM

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A buyout won't rescue investors.

What happened

Shares of video game retailer GameStop (GME 3.46%) plummeted on Tuesday after the company disclosed that it was ending its effort to sell itself. The stock was down about 26.5% at 11:15 a.m. EST.

So what

GameStop first disclosed that it was talking with third parties about a possible acquisition in June of last year. The stock has been hammered over the past few years, and is down around 75% from its multiyear high in late 2015. The company's core business of selling video game discs at retail is under pressure from the increasing digitization of games, and a buyout looked like the best option for investors.

Man holding head looking at declining charts.

Image source: Getty Images.

But there will be no buyout. GameStop announced on Tuesday that it has concluded its efforts to sell the company. It blamed a lack of available financing on acceptable terms to a prospective acquirer for its failure to secure a deal.

The company's strategic review did lead to a transaction: the $735 million sale of its Spring Mobile business. GameStop's diversification into selling mobile devices never made much sense, and gigantic write-offs related to the Spring Mobile business in late 2017 made it clear that the strategy wasn't working. The sale of Spring Mobile closed on Jan. 16, and the company has yet to determine how it will use the proceeds.

Now what

GameStop didn't have a particularly good holiday season. Total sales dropped 5% year over year, while pre-owned sales tumbled 16.4%. The sale of pre-owned video games is GameStop's cash cow, and it's a business that's in some serious trouble.

The era of the physical game disc will eventually come to an end. GameStop's core business will die along with it. With a buyout off the table, there's no longer much of a bull thesis for the stock.

Check out the latest GameStop earnings call transcript.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop. The Motley Fool has a disclosure policy.

Stocks Mentioned

GameStop Stock Quote
GameStop
GME
$27.52 (3.46%) $0.92

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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