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
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
), via streaming video games.
) 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
The recent streaming advances by both Sony and Microsoft are
further exasperated by the continued competition by long time
, owned by
, which only add to the competitive problems facing
GameStop. Finally, on March 18,
), 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.
When word first hit on January 7
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
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
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%
The GameStop story looks a bit grim for the coming years, but
if you remember back in 2010,
) 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).
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