Is it Game Over for GameStop? - Analyst Blog

Is it Game Over for GameStop?

After almost 25 years in the Video and Gaming rental business, Blockbuster Video filed for chapter 11 bankruptcy protection in September of 2010.  In August 2010, after two previous chapter 11 bankruptcy filings, Hollywood Video finally liquidated all its assets. 

Why did these once dominate companies fail so spectacularly?  Streaming video was the main culprit.  The advent of streaming video by companies like Netflix NFLX and Hulu enabled movie and gaming lovers to stay at home, not deal with late fees, and save money.   

Currently, companies such as Netflix and Hulu are major players in the streaming video market, but heavy competition is aimed directly at GameStop GME, via streaming video games. 

New Competition

Sony Corp SNE, and Microsoft MSFT are moving towards allowing all their games to be rented through their respective consoles.  In January of this year, Sony announced the advent of PlayStation Now, a cloud-based system that allows users to use PS2 and PS3 games on the PS4 system, and the handheld PS Vita.  More importantly, PlayStation Now will have both subscription and game rental plans.  In recently leaked images of PlayStation Now, the rental durations are variable (great news for gamers). 

Microsoft was ahead of the live game streaming revolution, but was unable to have it fully functional when the Xbox One launched in November of last year.  Over the last four months, Microsoft has fine- tuned their streaming through the Twitch app, and launched the Xbox One version it in tandem with their hit title Titanfall. 

The recent streaming advances by both Sony and Microsoft are further exasperated by the continued competition by long time nemeses, Redbox, owned by Outerwall OUTR,and GameFly, which only add to the competitive problems facing GameStop.  Finally, on March 18, Wal-Mart WMT, announced that they too were jumping in the fray by offering to purchase used video games in exchange for store gift cards, which could be used for anything in the store from groceries to white wall tires. 

Street View

When word first hit on January 7^th of Sony's PlayStation Now, shares of GameStop dropped over 10%.  When Wal-Mart announced their used video game program, shares of GME dropped over 5%, and made the company the S&P 500's worst performer on the day.  Moreover, since Sony's announcement, short interest (short money players) has increased 41% (through March 14) to just over 35.2 million total shorted shares (up from 17.8 million in January).  Adding additional pressure, the research group NPD reported that overall game software sales in the U.S. dropped 9% in February.   

Analysts were not too friendly with the earnings adjustments (per share) either; Q1 earnings estimates have dropped from $2.14 to $1.92, Q2 earnings estimates have dropped as well, from $0.60 to $0.54.  More strikingly is the annual estimates; 2014 earnings estimates have fallen from $3.24 to $3.02, and 2015 estimates decreased from $4.08 to $3.85.

Anticipation of Today's Q4 2013 Earnings Announcement

Before the opening bell today, GameStop announced first quarter earnings and revenue.  While GameStop saw a 3.4% rise in fourth quarter revenue due to demand for new game consoles from Sony and Microsoft, they missed on both top and bottom lines.

Earnings came in at $1.89 per share, missing the Zacks Consensus Earnings Estimate of $1.92, and Revenues were reported of $3.68 billion, missing the Zacks Consensus Revenue Estimate of $3.78 billion.  This has caused the stock to drop almost 5% in pre-market trading. 

Bottom Line

The GameStop story looks a bit grim for the coming years, but if you remember back in 2010, Best Buy BBY began to repurchase used video games, and Best Buy is still repurchasing games today.  Yet the street does not consider them a big competitor in the market.  So if GameStop was able to fend off a big retailer like Best Buy, why can't they do the same to Wal-Mart? 

One of the major strengths of GameStop is their 31 million member strong PoweUP Reward participants.  This very loyal group of gamers was one of the main reasons the company has been able to fend off competition by the likes of Best Buy. 

While GameStop has a lot of cash on hand, and sports a strong balance sheet, there are still significant headwinds facing the company over the near and long term.  With increased competition, and new streaming technology by several companies, GameStop is attempting to weather the storm by offering a $436.5 million share repurchase program for 2014 (after repurchasing 1.037 million shares in Q4), shutting down 2% of their brick-and-mortar stores, and a 20% increase in dividends (March 25 saw quarterly dividend payment of $0.33 per share).

It is going to be a difficult year for GameStop, but the company has proven before that it can withstand big competition while holding onto a large portion of the used video game segment.  Currently, GameStop is a Zacks Rank #4 (Sell).