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Over the month, GameStop (NYSE: GME) gained 21% following Q3 earnings under the new leadership of CEO Ryan Cohen. However, investors in this iconic video game retailer are still down 11% year-to-date, recently holding at $15.24. 

Zooming out further, during the social media orchestrated short squeeze, GameStop reached its all-time-high record of $483 per share on January 28, 2021. While hardly anyone expects to see those artificially induced highs again, what is the realistic path forward for GameStop’s fair valuation?

In other words, what hurdles does a brick-and-mortar video game chain face, and how does Ryan Cohen plan to address them?

The Blockbuster Parallel

GameStop is the world’s largest video game retailer, operating 4,413 stores. The same could have been stated for Blockbuster in the video rental arena, having once run over 9,000 sites. Both business models face an identical core problem – digital content distribution.

It is by far more cost-effective to pay for data traffic than to upkeep buildings. Likewise, the software interface replaces personnel upkeep. And just like Netflix (NASDAQ: NFLX) superseded Blockbuster, GameStop faces the same type of expulsion from Steam, Epic Games Store, Microsoft Store, GOG, Origin, and others.

Presently valued at $4.64 billion, GameStop can tap into a $187.7 billion global games market. This represents a 2% year-over-year growth. For comparison, Epic Games is privately valued at $31.5 billion, while having around 15% digital distribution market share.

“We realized early on that we needed to take a really, really bold approach, and a disruptive approach, and so the free game program was launched, exclusives were launched.”

Epic Games founder Tim Sweeney for PCGamer in June 2020

As this battle waged against the dominant player, Steam racked up its monthly active users (MAUs) to 132 million, while Epic Games Store’s increased to 58 million. This is the battlefield arena in which GameStop must enter to gain sustainable stock appreciation.

GameStop is Recuperating but is Still in Decline

Although GameStop has a digital store, its gaming offering and range of features are lacking compared to those of its key competitors. With the likelihood of getting ahead of Steam or Epic Games Store being very low, wouldn’t GameStop’s brick-and-mortar burden further leave it behind?

GameStop’s Q3 2023 earnings released on December 6th showed a 9.1% decrease in net sales, at $1.186 billion compared to $1,078 billion from a year-ago quarter. However, the company managed to improve cost-effectiveness to some degree.

Selling, general, and administrative (SG&A) expenses decreased to 27.5% of net sales compared to 32.7% from a year-ago quarter. In total, cost of sales decreased from 75.4% to 73.9%. Together with reduced operating losses, this led to a net loss of $3.1 million, a significant improvement from $94.7 million a year ago.

Still, even in that stay-above-the-water phase of its journey, GameStop significantly missed the consensus estimate of $1.182 billion in revenue. It is also notable that GameStop’s brick-and-mortar aspect is not gaining ground. Hardware and accessories comprise 53.7% of the company’s net sales, but this division is 7.5% down from a year-ago quarter.

Ryan Cohen’s Novel Plan

Last week, GameStop’s board approved a new policy enabling Ryan Cohen to use the company’s capital (around $900 million in cash and equivalents) to invest in stocks. Previously, this was reserved for safe-haven assets such as US Treasuries, holding $261.8 million.

Because this monetized debt is backed by the full faith and credit of USG, it is often used as a passive income stream. Circle (USDC) and Tether (USDT) heavily take advantage of short-dated Treasury yields to boost cash flows on top of their stablecoin fees. With the new policy decision, Cohen is exposing GME to the vagaries of the stock market.

Moreover, this signals investors that GameStop delivers lower investment returns than other stocks. On the other hand, if Cohen succeeds in his stock bets, he could boost GME with buybacks. Cohen’s success in founding online retailer Chewy (NYSE: CHWY) in 2011 and then selling it to PetSmart in 2017 for $3.35 billion may lead some to think he could pull it off. 

Yet, even if that eventuality materializes, it is not yet clear how GameStop could leverage its core business model in the age of digital distribution. Cohen outlined his vision for GameStop as:

“a powerful e-commerce platform that provides competitive pricing, broad gaming selection, fast shipping and a truly high-touch experience that excites and delights customers. This is the type of world-class infrastructure that was constructed at Chewy, which is worth multiples of GameStop’s current market capitalization.”

Ryan Cohen in a letter to GameStop board in November 2020

At this stage, e-commerce is one of the most competitive markets in the world. Even back in 2020, e-commerce decision-makers rated the market at the highest level as “very tough” (40%) and “tough” 44%.

Chewy was successful because it was the first to scale up online sales of pet products. Scaling has already been accomplished in video gaming, with remaining players vying for scraps. At this stage, e-commerce is one of the most competitive markets in the world.

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