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Why GameStop Stock Fell Today

By Joe Tenebruso – Oct 9, 2020 at 6:37PM

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Investors may have overreacted to the company's partnership with Microsoft.

What happened

Shares of GameStop (GME 3.46%) declined by 11% on Friday, as the video game retailer gave back a good chunk of its recent gains. 

So what 

GameStop soared a staggering 44% on Thursday after it announced a "strategic partnership" with tech giant Microsoft (MSFT 0.13%). Its retail stores will use Microsoft's cloud-based Dynamics 365 business applications for their in-store and back-end operations. GameStop's sales associates will also use Microsoft Surface devices to better serve customers, as well as Microsoft Teams to more easily collaborate. 

A chart that rises then falls, with a segment that continues to rise erased.

GameStop's shares reversed course on Friday. Image source: Getty Images.

Most notably, GameStop will begin selling Xbox All Access, Microsoft's subscription service that provides an Xbox gaming console and access to more than 100 games with no upfront cost. The financial terms of the deal were not disclosed, but GameStop said it would "benefit from the customer acquisition and lifetime revenue value of each gamer brought into the Xbox ecosystem."

Now what

Other than its newfound ability to sell Microsoft's gaming subscriptions, GameStop's announcements don't exactly address its major problems, namely that digital game downloads reduce the need for people to shop at its stores and threaten its profitable used-game trade-in business. Moreover, it's unlikely that the revenue GameStop receives from sales of Xbox All Access will be enough to make up for the sales it loses to e-commerce retailers and online game platforms.

Unsurprisingly, analysts began to warn on Friday that investors likely overreacted to the partnership news by bidding GameStop's shares up so high, and its stock price fell in kind. 

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

Stocks Mentioned

GameStop Stock Quote
GameStop
GME
$27.52 (3.46%) $0.92
Microsoft Stock Quote
Microsoft
MSFT
$255.02 (0.13%) $0.33

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

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