Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Amazon vs. GameStop

By Rick Munarriz - Apr 12, 2021 at 10:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Let's pit this year's hottest retail stock against the world's most successful online retailer. It's time to play.

As great as an investment Amazon (AMZN 3.15%) has been for long-term growth investors it's no match lately against the meteoric stock rise of GameStop (GME 0.92%). The video game retailer saw its stock more than triple last year, and this year it catapulted as a "meme stock." Even after retreating sharply since their frenzied peak the shares are up 741% this young year. 

If we draw the starting line at the end of February last year GameStop is a stunning 45-bagger. That's a jaw-dropping spurt in a little more than 13 months. Amazon's been a perpetual market beater but you would have to go back 12 years to find the point where the world's leading online retailer is also a 45-bagger. 

GameStop is the hot stock, but the fundamentals are overwhelmingly in Amazon's favor. Let's size up each name to see which one is the better buy right now.

A PC gamer with a headset cheering a victory.

Image source: Getty Images.

GameStop comes to play

Step aside from the hype, and GameStop investors are caught between a stock and a hard place. The company has posted 12 consecutive quarters of year-over-year declines in revenue, even in its latest financial report where low-margin PS5 sales weren't enough to will the retailer to positive sales growth. 

The empire is shrinking its physical footprint, closing 12% of its stores over the past year. This isn't necessarily a bad thing, especially with the surge in e-commerce giving investors hope that the nostalgic brand can be repositioned in a digital future. GameStop will have to keep cutting costs if it wants to compete more effectively with Amazon and other online specialists, especially with its highest margin business -- the resale of physical video games -- fading in the online revolution. 

Net sales have been nearly cut in half over the past five years, down 46% from where they were five fiscal years ago. A few years ago GameStop was a money machine, but it has posted three consecutive years of steep losses. GameStop doesn't seem to look the part of a stock hitting all-time highs this year, and with short interest dropping substantially is there life for GameStop beyond the meme squeeze? 

The key to GameStop justifying its 45-fold spike since the end of February last year is its ability to transform. It will die if it stands still. There's fresh blood flooding the boardroom and its executive ranks. Will that be enough? It's playing from behind at this point.

Amazon makes it rain

In the same five years that GameStop's business has been roughly cut in half we've seen Amazon revenue more than triple. Momentum is naturally on Amazon's side here, accelerating with the 44% year-over-year top-line spike in its record-breaking holiday quarter

There is a lot Amazon excels in, but it's also everywhere GameStop wants to be. It's been selling video games and related gear online for more than two dozen years. Amazon's Twitch is the gold standard for diehard gamers looking to share their in-game streams, a market that GameStop would love to own. Digital distribution is largely in the hands of console makers and software publishers, but if GameStop sees an opportunity in joining the crowded realm of cloud-based gaming services it will have Amazon's recently unveiled Luna to reckon with now.

Facing the end boss

Everywhere GameStop turns for growth it seems as if Amazon is already there. This isn't the real problem for the hot-but-damaged retail stock. GameStop's enterprise value of $11.6 billion is less than 1% of Amazon's $1.7 trillion.

The problem for GameStop is that a lot is expected with the stock at new highs but its fundamentals are at new lows. GameStop has tried to make a dent in digital, even years ago when it actually had the cash flow to deploy next-gen growth initiatives. It didn't work then. There's a lot of brand awareness now as a meme stock, but the clock is ticking on its ability to turn its influencer cred into a bankable business. Amazon is the best buy at this point. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
$123.42 (0.92%) $1.12, Inc. Stock Quote, Inc.
$109.56 (3.15%) $3.35

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.