The stock of GameStop $GME has been very volatile lately with all the activist investors involved and a possible short squeeze in sight. But what about the business? How is it changing? How is the Business of GameStop adapting for the future?
Many people are saying that GameStop is the next blockbuster and that it will go bankrupt. The reason why Blockbuster failed is because they failed to compete with Netflix $NFLX . Blockbuster did not have any catalyst that could change the business, GameStop does. The new console cycle will boost both sales and profits.
It is wrong to assume that because 85% of game sales are digital that GameStop business is dead. This number takes into consideration mobile games too, which are not always in competition with the games that are physically sold at GameStop.
GameStop also has the advantage of being an specialized store and I believe that's one of the reason why Ryan Cohen invested. He could compete with Amazon $AMZN with Chewy, he wants to do the same thing with GameStop. If GameStop business was irrelevant, Microsoft $MSFT would not have partnered with it. After closing all their physical stores in June, GameStop might become the unofficial Microsoft store.
Both Microsoft and Sony loses money on their Xbox and PlayStation respectively. They need to sell accessories to make money. GameStop can help them do that. It is unlikely that they would like to partner with GameStop just to sell the console.
This is going to improve the topline, that is, the revenues of GameStop. But they also have to improve the bottomline, that is, profits. Microsoft is helping GameStop with hardware, software and cloud services to make them more efficient. One of the main issues of GameStop was its high SG&A. This partnership can lower the SG&A.
My initial analysis of GameStop was for it to deliver $200 million in FCF the year following the launch of the PS5 and Xbox. But with these changes in the business, they are already delivering more FCF. At current price, GameStop still looks very cheap.
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