Reddit stock traders hype any move GameStop (GME 2.56%) makes, regardless of whether it actually means anything. The stock simply ticking higher is seen as a sign a moonshot is coming and pointing out the lack of a fundamental basis for the increase often invites condemnation.
But there are some very good reasons why GameStop's business can succeed, so forget what Reddit is saying and instead look at why it can win.
Image source: Getty Images.
The new e-commerce strategy is a good start
Even before GameStop announced it was pushing forward with a new e-commerce strategy, there was good reason to believe the video game retailer could succeed, but this online initiative gives it a good start.
As activist investor and board member Ryan Cohen has detailed, GameStop has an invaluable brand in the gaming community, and for all its many faults, its business is synonymous with the industry.
That gives it a unique foundation to build upon, and while it shouldn't abandon its physical retail roots, it also needs to focus on where gaming is heading. That's online and digital, so becoming the go-to e-commerce destination is essential. GameStop gave a hint of the potential during the pandemic when online sales soared; now it needs to transition more fully into the Amazon of gaming.
Putting Cohen and two other activist investors in charge of this initiative shows GameStop is serious about the effort, and though we need to see what actually develops, the creation of a committee is a good omen.
Still a destination where gamers can go
Cohen has also rightly pointed out GameStop just has too many stores and it needs to focus on the best-performing locations.
Yet it needs to do more than just be some cramped quarters and offer up a more fun, inviting atmosphere. The video game console upgrade cycle showed how the retailer can straddle both the digital and the physical worlds, and also be a place where gamers want to go to look for physical media. There is still a huge percentage of gamers who want to hold that game in their hands, and GameStop can't abandon them.
The resale trade has long been its bread and butter for revenue, and that needs to remain a part of the future, but also its stores need to be where gamers can try out the next generation of games and equipment. Try in store, buy online could be a very successful formula for selling virtual reality-based games and gear, for example. Trying out expensive new headsets and controllers beforehand can provide consumers with the confidence to make the purchase.
Don't forget new growth opportunities
GameStop was already heading in this direction before the activist investors targeted the company, but the retailer's dive into the growing phenomenon of esports signals a new growth opportunity for its business.
Its stores were already a place where gamers went to have community and social interaction, and the whole esports industry is all about that on steroids. A GameStop store that provides an immersive experience could also be the go-to destination for participants.
It signed a bunch of partnerships before the pandemic struck and those could be put to good use as the economy reopens and normalcy returns.
Recently, short-seller-turned-good-news-broker Citron Research suggested GameStop acquire Esports Entertainment Group (GMBL 0.61%), which would allow the retailer to cash in on both esports and the growing opportunity in sports betting. Whether Esports Entertainment is the right vehicle is open for debate, but it is a channel GameStop really ought to consider.
But also don't forget about value
All of this provides a good argument for why GameStop may have walked away from bankruptcy, and worse, irrelevance. It shows the video game retailer could be a good business to own, but not at any price, and not at these levels.
Shares of the video game retailer are still sky-high from the short squeeze rally that sent the stock soaring in January and are nearly 1,000% higher than where they started the year. That's not based on reality or the company's fundamentals, but on wishful thinking and a desire to keep the party going.
GameStop's stock trades at more than three times its sales, 52 times its book value, nearly 40 times the cash it has on hand, and 119 times the free cash flow it produces. Those are inflated valuations, not a stock priced to buy.
So although GameStop is a business that can win, its stock is not, at least not yet, and serious investors should wait for the inevitable pull of gravity before buying in.
