GameStop (GME -12.19%) quickly became one of the hottest meme stocks during the pandemic. Since mid-2020, it has gone from penny-stock status to a high of more than $480 over a six-month timespan.
However, struggles have brought volatility, and amid mounting losses and declining popularity, the retail stock has fallen steadily over the last three months. But rather than looking for a buying opportunity, investors may want to consider avoiding GameStop regardless of what happens.
GameStop lacks a meaningful competitive advantage
Indeed, GameStop has taken steps to adapt to today's retail gaming environment. An approach as a "digital-first, omnichannel retailer" aligns the company with the online format in which most games are sold today. Additionally, adding Chewy co-founder Ryan Cohen could help since he has already built a successful online business.
It has also begun to emphasize collectibles and consumer electronics. This allows GameStop to leverage its considerable physical footprint, giving it the ability to offer omnichannel sales.
However, these moves still leave the GameStop value proposition in question. GameStop shoppers may have a one-stop shop to choose games from multiple companies and could derive some cost savings for the consumer. Still, other businesses such as consumer electronics face numerous competitors.
Moreover, redefining itself means that its physical footprint has to shrink. Gamers typically do not buy their games in physical stores anymore, and GameStop's new focus will not support many of its locations. In 2020, it pledged to shutter hundreds of its stores by early 2021. As of the end of its second quarter, which ended in June, it operated just over 4,600 stores, down from around 5,500 at the end of 2019.
This lack of advantage may begin to appear in the company's financials. For now, it enjoys a good year. Revenue of almost $3.8 billion in the first nine months of 2021 grew 27% compared with the first three quarters of 2020. It also reported a net loss of $234 million during the first three quarters of 2021.
Still, this comes after revenue fell 45% between 2017 and 2020. Additionally, the company's lack of guidance for future quarters could indicate that the 2021 results are not sustainable. Analyst forecasts point to a consensus revenue increase for Q4 of only 4% and a decline of 1% in the next fiscal year.
Such forecasts could bode poorly for the stock. Although GameStop stock is up by about 60% over the last 12 months, all of those gains occurred in February of last year. Over the previous 11 months, GameStop has fallen by 15%. Investors may pass on this stock despite a price-to-sales (P/S) ratio of 1.2. With revenue falling and the lack of an apparent competitive moat, it could take more than a low sales multiple to draw investors back.
The state of GameStop
GameStop gained significant attention in 2020 and 2021 as a meme stock. However, those who consider GameStop stock a buy may want to reconsider. Yes, it has name recognition and leaders who have a history of succeeding with web sales, increasing its chances of survival.
Still, survival does not equate to the prosperity needed to move a stock. With its competitive advantages in the video game space largely gone, pivots into highly competitive niches will likely not translate into outsized returns for shareholders.