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The Console Upgrade Cycle May Not Help GameStop as Much as You Think

By Rich Duprey – Jun 21, 2020 at 10:49AM

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It's the big event the company -- and everyone else -- has been waiting for.

GameStop (GME -2.24%) has done an admirable job of clinging on until the upgrade cycle for video game consoles kicks in later this year, but there are warning signs appearing that it may not help the retailer's position as much as originally believed.

Although GameStop will undoubtedly benefit from the new sales that will flow from the introduction of the new Xbox from Microsoft (MSFT -0.20%) and Sony's (SONY -2.53%) PlayStation 5, the gains may be much more muted than expected. Delays could also pose a problem for the video game retailer.

Man playing video game in a store

Image source: Getty Images.

Just holding on

The problem for GameStop, as with the rest of the world, is the outbreak of the coronavirus pandemic. While the retailer surprised everyone with as much as 1,500% growth in e-commerce sales during certain weeks last quarter, it was left with just $18 million in net cash, which is a very thin lifeline to last until the new consoles are introduced, assuming they're on time.

With stores now opening again across the country after being on lockdown, GameStop may be able to generate sufficient sales to make it through to the finish line. Although comparable-store sales fell 17% in the first quarter, for the month of May, as its stores began to reopen, they were down just 4%. 

Yet GameStop still has several problems it needs to confront, a few the new consoles were supposed to resolve but now may not.

A long wait

First, Sony just released the details for its new PlayStation 5 console, and what surprised many was that there were two versions. One is a traditional console with an optical drive for physical discs; the other, without such a drive, is meant for digital gaming and downloads. 

With the latter possibly being cheaper than the former, sales of the console meant for physical media could lag, which would hurt GameStop as it obviously thrives on the sale and resale of video games.

Microsoft says its new Xbox Series X is still on schedule, with executive VP Phil Spencer telling CNBC at the end of April: "Overall, I think we're in line with where we thought we would be." But it may not be the consoles that are the problem but rather the games. There might not be many, and without games to sell, GameStop will be in trouble.

What to play

Video game developers are working remotely to produce games for the new systems, which creates problems that could mean greater delays in getting the games to market. Spencer said game development is a sprawling operation now, and because developers are not able to get together to collaborate as they typically do, whether there will be product to play on the consoles is "the bigger unknown."

If enough games are delayed for either platform, consumers may not see a reason to buy the latest consoles until there is enough content available. Fortunately, two of the biggest titles will at least be available, one for each console.

Spencer said that Halo Infinite, the next installment in the premier Xbox series, is still a go for fourth-quarter release on the new system, while Naughty Dog's Last of Us Part II, the sequel to the incredibly popular PlayStation game, was also being released for the PlayStation 4 on June 19.

The latter had been a big question mark as Sony and Naughty Dog first scheduled it to debut in February, then pushed it back to May, and then said it would be delayed indefinitely. Sony and Naughty Dog then revised the timing to the June release date. While initial reviews of the title are good, there is also an undercurrent of consumers who don't see it as a worthy successor.

Those two titles alone may make it worth it for gamers to buy the new consoles, but how many other options will be available is still up for debate, as is whether any delays in their release will affect sales.

Clock is ticking

No doubt GameStop will still see large day one sales of the new consoles, and the accompanying games, even if release dates are delayed, will eventually come. But the retailer is holding onto a very thin thread to make it over the hump, and anything that impedes the flow could fray its tether to the breaking point. Digital-focused gaming consoles and video game delays could be two big speed bumps.

That means the upgrade cycle might not be the big boost everyone is anticipating, which could increase the pressure GameStop is feeling from activist investors. It's yet another headwind in a storm of problems the video game retailer has to confront.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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GameStop Corp. Stock Quote
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