- GameStop is, by far, the world’s largest video game retailer.
- The company had been in steady decline for years, but the bottom has dropped out of its stock price across the last year – from $16 a share in January 2019 to under $5 by January 2020.
- The company is “a melting ice cube,” Wedbush analyst Michael Pachter told Business Insider. “For sure it’s going to go away eventually.”
- Here’s how GameStop ended up in such dire straits.
- Visit Business Insider’s homepage for more stories.
The world’s biggest video game retailer, GameStop, is in serious trouble.
In the past 12 months, the company’s stock value has dropped by two-thirds – from about $15 in January 2019 to under $5 by January 2020 – and it reshuffled its C-suite.
Like Blockbuster Video and Tower Records before it, GameStop faces major challenges to its business model from the internet. As more people buy video games through digital storefronts, fewer buy games on physical discs from GameStop.
But that’s far from the only issue with the company, which has suffered a staggering series of self-owns through poor acquisitions, half-hearted initiatives, and an inability – or unwillingness – to evolve.
The problems began in 2013.
In 2013, the current console generation kicked off with the launch of both the Xbox One and the PlayStation 4.
And with those consoles, a big shift happened: Every game was available through the digital storefronts operated by Sony and Microsoft (PlayStation Network and Xbox Live, respectively).
The implications of that were huge for the world's biggest game retailer. The foundation of GameStop's business is selling video games on discs. And with the digitization of console games, the company was facing an existential threat along the lines of iTunes' impact on record stores.
"Downloads became a thing and GameStop's business declined," the Wedbush analyst Michael Pachter, who covers the video game industry, told Business Insider in an interview last year. "They were just kind of oblivious to it."
And this is how the issues really began: from GameStop's inaction.
At the same time, GameStop took a big bet on an expensive new business: Spring Mobile. Then, it doubled down on that bet.
In 2013, GameStop embarked on a new initiative: smartphone stores.
"They just kept buying chains, and they were paying top dollar," Pachter said. "And then the earnings went down as soon as they bought them."
First, there was Spring Mobile, followed by the purchase of hundreds of storefronts from AT&T. By 2016, GameStop owned and operated just shy of 1,500 mobile-phone stores under the Spring Mobile name.
Those stores were expected to generate about $1 million apiece. And when they didn't generate that kind of money, they quickly became an expensive liability.
"It turned into a complete disaster," Pachter said. "These stores were going to do a million apiece. So with 1,500 stores you're looking for $1.5 billion in revenue and double-digit margins. So $150, $200 million profit, and I think they got to $80 [million]. They were just never even close."
Before the acquisitions, GameStop had cash in the bank and zero debt. By 2018, when Spring Mobile was sold for $700 million, the company was swimming in debt.
"I estimate they spent about $1.5 billion buying all these stores - $700 million in cash and $800 million in debt - and ended up selling for $700 million," Pachter said.
The company "went from no debt and generating about $400 million in cash, to $800 million in debt and generating $300 million in cash," he said.
By 2018, GameStop was looking for buyers from private equity — but its suitors couldn't convince financiers that GameStop was a smart buy.
At about $16 a share in late 2018, GameStop was apparently fielding interest from private-equity groups looking to purchase the ailing retailer - but those suitors couldn't persuade banks to finance the purchase.
There are, no doubt, several reasons for this.
Pachter speculated that it's largely a measure of uncertainty about the future of game consoles. In late 2018, it wasn't clear whether the next PlayStation and Xbox consoles would even have disc drives. And if they didn't have disc drives, there would be no discs to sell - thus cutting out the core of GameStop's business.
But now, in early 2020, we know the PlayStation 5 and Xbox Series X will have disc drives - both Sony and Microsoft have confirmed as much.
After GameStop announced its inability to go private, its stock price fell off a cliff and is now just over $5 a share, putting GameStop's value at just over $500 million.
In the wake of GameStop's inability to sell in late 2018, the company's stock went into free fall. From January 28 to January 29, 2019, the stock dropped from about $15 a share to about $10 a share. Another similar drop happened June 5, and the company's stock has yet to bounce back.
GameStop is now valued at around $5 million, its stock price just below $5 a share. When it was up for sale in late 2018, it was asking for $16 a share. In the past six months, the company's stock has lost about $1 billion in shareholder value.
At the same time, the company's C-suite has seen a major shake-up. Its latest CEO, George Sherman, took over the company in May 2019. Before him, Mike Mauler lasted just three months in the role.
But don't count GameStop out: With new consoles on the horizon that still play game discs, GameStop's business model isn't out the door just yet.
In 202, you can still buy music on compact discs and movies on Blu-ray discs. You could, of course, just stream music through one of several services, or you could buy a digital version of whatever album. The same could be said for movies.
That said, the world in which Sam Goody and Tower Records did good business selling music and movies on physical media (read: discs) is long gone.
But that doesn't mean the business model is dead.
"I definitely think it's a melting ice cube," Pachter said of GameStop's disc-based business model. "For sure it's going to go away eventually. And for sure their future will be truncated and eliminated the day that discs stop being manufactured."
But that doesn't mean the disc-based business model is leaving just yet - with new consoles from Microsoft and Sony coming in 2020 that play discs, "they just got a seven-more-year reprieve starting in 2020," Pachter said. "GameStop's got about 10 years before that ice cube is fully melted."
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