Flashy partnerships that GameStop is announcing won’t stop the company from going out of business in the long run.
Over the last two years, a lot of investors have been interested in GameStop (GME 11.96%), making it the stock that most people think of when they hear the word “meme.” Chairman Ryan Cohen and CEO Matt Furlong, who were both hired last year, are working to grow the business by adding more products to their catalog, making big investments in e-commerce, and starting new non-fungible token (NFT) marketplaces and other crypto-related businesses.
Cohen and Furlong sold GameStop stock to investors as a story about a big change. Things look very different on the ground, though. GameStop is a dinosaur store that is slowly dying, just like it was a few years ago when it was run by a different team.
GameStop keeps making a lot of noise.
In 2022, GameStop started to try to make a name for itself in the crypto community, especially with NFTs. It announced in February that it would work with Immutable X on the NFT marketplace that GameStop was making.
After that, GameStop made a digital asset wallet available in May and made the beta version of its NFT marketplace open to the public in July. And just last week, the business announced a new partnership with the American branch of crypto giant FTX for e-commerce, internet marketing, and gift card sales.
Since each of these efforts is brand new, it’s too soon to say for sure what they will mean for GameStop in the long run. Even so, management hasn’t shown investors anything to suggest that they can turn the failing business around. Aside from an initial rush of activity, the number of transactions on the NFT marketplace has also been low.
Another bad report on earnings
The main part of GameStop’s business is still losing money. The company reported a big loss for the first quarter three months ago, but sales were up 8% from the same time last year. GameStop may have just compared sales from one year to the next, but any growth allowed management to say that things were going in the right direction.
GameStop, on the other hand, said that its sales dropped by 4% from the same time last year to $1.14 billion in the second quarter. This was about $100 million less than what experts had expected. Also, the company’s net loss was less than it was the quarter before, but from Q2 2021 to Q2 2022, it almost quadrupled, reaching $107 million.
So, even though GameStop has spent money on more contact centers, fulfillment locations, and product categories, its business is still going down. Also, compared to before the pandemic, the company now makes more money from low-margin hardware sales than it did before. That will make it especially hard for GameStop to make money.
GameStop is (mostly) free to use.
After spending more than $400 million in the first half of fiscal 2022, GameStop ended Q2 with $909 million in cash and cash equivalents that could be used for anything. When working capital problems are solved, cash burn may slow down even more. This gives the business a lot of time to fix things before it needs cash quickly. If the price of the stock stays high, GameStop might think about issuing more shares to improve its balance sheet.
GameStop probably won’t get better over time, which is a shame. At its peak, the company made most of its money by selling physical game discs, especially used games. The long-term trend toward digital downloads has killed that source of income and profit, and GameStop hasn’t found anything to replace it.
GameStop has been looking for ways to cut costs, which suggests that its efforts to grow were not successful. In the future, the business’s management will have to make the unappealing choice of either drastically cutting the number of shops to save money (which will mean less money coming in) or keeping thousands of locations to try to bring in more money (leading to heavier losses). Any way you look at it, it’s likely that GameStop stock will keep going down over the next few years.
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