GameStop (NYSE: GME) inventory has received an extraordinary amount of attention lately. It’s in the middle of a shopping frenzy that started on the Reddit forum subgroup r / WallStreetBets. At one point, the price for one share of GameStop stock rose by an overwhelming 1.063% in January alone. That rise was fueled in part by some investors rushing to cover stocks they were short on.
While the reason for the excessive purchases and sales of GameStop stock is more related to some (potentially lucrative and potentially harmful) quirks of stock trading, GameStop as a company essentially has one undeniable advantage that could make it a worthy stock to buy in the longer term. to own. .
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Hardcore gaming enthusiasts are key
GameStop is a video game retailer with more than 5,000 locations in at least 10 countries. Having so many locations isn’t ideal when there’s also a major shift in the video game market towards digital purchases. Furthermore, next-generation game consoles are now out and selling well, enabling digital-only versions of games with the intent of enticing consumers to accelerate their shift to digital purchases. Video game producers prefer to sell them digitally because it lowers the cost of packaging and shipping the products to customers and limits the resale of those games by the first buyer. That may partly explain why GameStop has been forced to close more than 800 physical locations since 2019, with plans to close an additional 200.
Some of the most avid gamers (those who play for so many hours they get bored of games easily) prefer a physical copy. Why? That’s because when they’re done playing a game, they can sell it or trade it with friends – an option not available to them with a digital copy. GameStop caters to this crowd, offering trade-in and used games for sale. This gives hardcore gamers the opportunity to recoup some of their video game purchase price, and allows others to purchase used games at a discount on the retail versions.
Today, digital games typically sell for the same retail price as their physical counterparts. For gaming enthusiasts, the physical copy is still the better option, and therein lies the undeniable advantage that GameStop currently has. Unless game manufacturers are willing to drop prices for digital versions or have digital games used as a trade-in to buy new games, GameStop remains a destination for gaming enthusiasts.
What this could mean for investors
At the very least, this persistent demand means GameStop won’t be made irrelevant anytime soon. This perk is certainly not enough to grow sales, but it may be enough to buy GameStop management time to run its business model. After all, revenues have only declined at a compound annual rate of 3.3% over the past decade, which isn’t disastrous. Of course, revenues for the brick-and-mortar retailer were much worse in 2020 due to temporary store closures necessary due to the pandemic, but the launch of new game consoles from Sony and Microsoft helped comparable store sales increase 4.8% over the nine-week holiday period.
Data source: Ycharts.
Granted, this advantage may not be enough to justify the current high stock price, which is trading at a price / sell ratio comparable to several FAANG stocks (see chart above). In fact, it trades at a higher forward P / S ratio than Amazon.
Unfortunately for GameStop shareholders, the stock is dropping from the all-time high per share of nearly $ 350 to $ 60 at the time of writing. Investors who want to make a wise decision should put their money into more proven winners.