There's someone else gunning for GameStop (NYSE: GME) these days.
During last week's quarterly conference call, Redbox parent Coinstar (Nasdaq: CSTR) announced that 4,500 of its kiosks were now spitting out video game rentals.
Unlike the nightly $1 DVD and $1.50 Blu-ray rentals, games will set console owners back $2 a night. It's a compelling value proposition, though, since new games fetch as much as $60 when purchased as new.
Redbox's new wrinkle is likely to hurt video game rental specialists Gamefly and Blockbuster more than it does GameStop, but it's hard to see the small box retailer not taking a hit here.
GameStop earns a cozy living selling games, buying them back, and then reselling them as used titles. All three aspects of GameStop's model suffers if gamers have cheaper access to titles that they would otherwise quickly tire of and sell back to GameStop at a steep markdown.
The resale business is already threatened by Amazon.com (Nasdaq: AMZN), Best Buy (NYSE: BBY), and Toys "R" Us tiptoeing into this niche. The inevitability of digital delivery -- with all three console makers pushing their online marketplaces for direct transactions -- is another knock on the bricks and mortar model.
It also doesn't help that video game hardware and software sales have been in a slump since early last year.
GameStop bulls will argue that the obvious bearish arguments haven't made much of a dent on the company's fundamentals. Comps have softened but earnings continues to grow. The stock -- an optimist can argue -- is a steal at a mere eight times this year's projected earnings and just seven times next year's target.
Unfortunately, Wall Street pros may be slow to recognize the gravity. They overestimated GameStop's financials three months ago, and it's only going to get uglier as GameStop deals with a shrinking slice of a diminishing pie.
Don't underestimate Redbox's role as a disruptor. Blockbuster has filed for bankruptcy and Movie Gallery has disintegrated over the past year, yet Redbox's DVD revenue soared 54% in its latest quarter -- nearly twice the growth investors unearthed at fellow DVD disruptor Netflix (Nasdaq: NFLX).
GameStop was already threatened to be buried alive by some pretty players. Now it has a model-crushing speedster shoveling dirt on top of it.
Where do you see GameStop in five years? Share your thoughts in the comment box below.
