Video game retailer GameStop (GME 1.59%) has spent much of the past year in the news, primarily because of its meme-stock status after a historic short squeeze sent the shares soaring more than 1,800% at its peak. But the jokes have now become serious questions about the company's ability to turn around its business; e-commerce competitors and the ability of gaming companies to go directly to consumers have hurt GameStop.
The company recently announced intentions to build a marketplace for non-fungible tokens (NFTs), and a recent report suggested it might invest in integrating NFTs and blockchain technology into games. Is this the big break GameStop needs to evolve, or is it a trap for retail investors? Here is why GameStop's recent NFT news probably won't help the stock in 2022.
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Saved by the meme
GameStop's financials were starting to take on water heading into 2021. The business had posted operating losses for the previous three years, and its roughly half-billion dollars in cash on hand was offset by about the same amount of debt. With revenue falling from $8.2 billion in 2018 to $6.4 billion in 2019 to $5.0 billion in 2020, GameStop was dying a slow death.
GME Total Long Term Debt (Quarterly) data by YCharts
Things changed in the fall of 2020, when pet products e-commerce company Chewy's co-founder Ryan Cohen disclosed a position in GameStop and expressed a desire to get involved in the company's turnaround efforts. He's now the chairman of GameStop.
GameStop was one of the most heavily shorted stocks on Wall Street until that point, and the news caused a surge of retail investor interest, along with a short squeeze that sent the stock to incredible heights. But rather than marvel at the stock's surge, GameStop acted, taking advantage of the lofty share prices to raise $551 million in April 2021 and another $1.13 billion in June 2021. Management used the proceeds to pay down debt, though the company still has about $1.4 billion at its disposal. GameStop is no longer in financial distress.
Are NFTs the answer?
But the company's long-standing challenges remain, even though 2021 Q3 sales were up 30% year over year, to $1.29 billion. Analysts expect a rebound from COVID headwinds in 2022, projecting 17% revenue growth. However, 2023 estimates call for little change or even a slight decline in revenue, signaling that GameStop's recovery could be short-lived.
Therefore, GameStop's potential entrance into NFTs -- which are virtual certificates of ownership of art, videos, and yes, game-playing items -- is a huge move for the company. There's a lot of evidence of the growth potential of NFTs. OpenSea, the leading NFT marketplace, saw a 646-fold increase in trading volume in 2021 and was recently valued at $13 billion. Cryptocurrency platform Coinbase's looming launch of an NFT marketplace only puts more weight behind the trend.
GameStop's desire to start an NFT marketplace and experiment with blockchain is bold, but investors should have some concerns. The insane growth of trading volume on OpenSea could point to NFTs being another viral craze that flames out at some point. NFTs could be a great technology with tons of eventual uses, but there is a distinct possibility that many NFTs will end up worthless, part of a sensation that saw lots of people trying to make quick money.
Meanwhile, GameStop will have to compete with OpenSea and Coinbase, which are larger and more purely dedicated to the NFT and blockchain market. Can GameStop make a practical and secure marketplace -- and attract enough people to use it? Investors ultimately need GameStop to turn this initiative into a durable business that generates recurring revenue (and profits) for the company to be successful over the long term.
Is GameStop a 2022 winner?
Unfortunately, it's nearly impossible to know the answers to these concerns today. GameStop must execute on all of this, and the results need to show up in the quarterly earnings. The stock itself has come down from its short-squeeze highs, but with a market cap of nearly $10 billion, it's still many times larger than at any point before the short squeeze.
Meanwhile, the company still mainly consists of a struggling retail business with the same challenges it has faced for years. You can never know for sure what a meme stock will do, but it seems like there is a lot of optimism priced into GameStop.
It's hard to see a ton of upside in the stock without some concrete evidence of progress in these new NFT ambitions, and GameStop is likely a ways off from showing that. Until that happens, GameStop is a speculative investment that investors should approach cautiously.