What happened

Shares of GameStop (NYSE:GME) tumbled lower after it was reported that Netflix (NASDAQ:NFLX) had hired a former executive at Facebook and Electronic Arts to help it expand into video games. GameStop shares were trading down 13.1% as of 11:18 a.m. EDT on Thursday.

GameStop's stock price has skyrocketed this year, with some investors hoping the video game retailer can make a comeback with efforts to close underperforming stores and ride the upgrade wave with Sony and Microsoft's new game consoles. While the Netflix news doesn't look good, it doesn't change the competitive pressure GameStop had already been experiencing in the video game retail market. However, there is a glimmer of hope.

GME Chart

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So what

Bloomberg reported on Wednesday that Netflix is planning to offer video games within the next year, and these games will be offered at no extra charge to subscribers. The games team at Netflix will be led by Mike Verdu, who has previous experience at Zynga, Atari, and Electronic Arts and has worked on Facebook's virtual reality content. 

Netflix toyed with the idea of offering a video game rental service back in 2011 before scrapping that idea. This new push into gaming appears to be centered around offering original gaming content based on some of Netflix's intellectual properties, such as Stranger Things.

A customer pulling a packaged game off a shelf at a retail store.

Image source: Getty Images.

Now what

GameStop's business has been suffering a slow decline over the last decade as more gamers choose to buy their games digitally over their PC or console instead of buying a packaged game disc at one of its 4,698 retail stores. From fiscal 2016 through fiscal 2020, net sales declined from $7.9 billion to $5.1 billion, while the cost to support its store fleet has caused profits to plunge from $305 million to a net loss of $215 million over that time. 

The launch of the new game consoles helped spark a 25% increase in net sales in the fiscal first quarter. Analysts expect GameStop to report a 9.5% increase in sales for fiscal 2021, as sales of new gaming hardware will likely trigger additional game purchases. The Netflix move to offer gaming content won't remove sales of game consoles from GameStop's business, but it serves a reminder that GameStop needs to change fast to survive.

It recently hired former executives from Amazon to try to turn things around. GameStop recently appointed Mike Furlong, former leader of Amazon's Australia business, to be its new CEO last month. These are part of GameStop's effort to shift to a "growth phase," as management explained on its last earnings call.

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