GameStop's Future Dims as Buyout Talks End Without a Deal

Video game retailer is no longer trying to sell itself, but prospects for sustainability don't look promising.

Rich Duprey
Rich Duprey
Feb 12, 2019 at 10:00AM
Consumer Goods

The growing popularity of digital gaming downloads has lead many to predict the demise of GameStop (NYSE:GME). That potential moment is a lot closer to reality now, after the video game retailer said it was no longer trying to sell itself.

A lack of available financing on terms that would be acceptable to potential buyers has caused those would-be buyers to take their quarters elsewhere. Because GameStop already sold off its Spring Mobile AT&T stores, the remaining hodge-podge collection of disparate businesses -- the ones it's actually banking on to fuel its future growth -- offer little in the way of sustained potential for the company.

A man playing an online video game

Image source: Getty Images.

This may be as good as it gets

On the surface, GameStop's third-quarter earnings report last November seems to argue against that logic:

  • Accessory sales surged 32.6%, year over year
  • Collectibles sales were up 11.7%, year over year
  • Digital revenue was up 29.5%, year over year

The problem is, those businesses collectively account for only 19% of GameStop's total revenue, and much of those gains are tied directly to the current popularity of Fortnite, a battle royale-style of online play, and similar gaming options.

For example, Electronic Arts' Apex Legends got off to a quick start by attracting 10 million players in the first 72 hours it was available, though it is unknown how long such game play will remain popular. These free-to-play games were expected to generate as much as $2 billion in revenue for their makers, solely from in-app purchases.

However, the Federal Trade Commission has launched an investigation into such loot boxes across all of gaming, because the $30 billion industry has been likened to a form of gambling, meaning a crackdown on their availability or their ability to charge for purchases could be coming. It's noteworthy because the surge in GameStop's digital receipts was driven primarily by the strength of such digital currency sales.

The gains of the collectibles market were largely due to the popularity of Pop! Vinyl toys, the big-headed dolls from Funko. But as GameStop's CFO Robert Lloyd noted, as much as collectibles is growing, its competitors are adding the toys to their shelves in greater numbers, too, suggesting the growth seen could ease. What GameStop has going for it right now is that it can get exclusives on certain figures, but that also may not be a long-term advantage it can hold onto.

The core business is history

The real business of GameStop is in the sale of video games, both new and used. Cloud-based and mobile gaming, along with game developers offering direct download play, is undermining the specialty retailer's ability to survive.

It's only going to become more difficult as Apple is reportedly working on a subscription-style game streaming service and may even become a game publisher, while it's rumored might also launch a game streaming platform.

GameStop has the added difficulty that it is currently operating without a permanent CEO. While finding one could have been hampered by the retailer's search for a buyer, once a new chief executive is found, he or she may want to change aspects of the business to meet his or her own standards. That could mean any of the ancillary businesses it has now could be jettisoned. Even if he wanted to expand them, neither alternative seems welcoming.

Check out the latest GameStop earnings call transcript.

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Key takeaway

GameStop's stock cratered after it announced it took itself off the market, losing all the gains it had made following that upbeat earnings report at the end of November. As part of another company, or in the hands of private equity that could make the hard choices necessary to save the business, the quarterly report was hopeful. Yet if GameStop is staying independent, its hard to see how it keeps playing with the competition.