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17 Feb 2021
The GameStop rollercoaster – What should GameStop do to get out of the pit?
by Candice Wan, Analyst, Caelus Hong Kong Office

The stock market was wild in the last week of January because of the GameStop (NYSE: GME) saga, and it has taught us many things about stock market extremity, laws, wealth inequality, the power of social media, nostalgia, mass psychology...
The incident shows that trading and investing are not the same thing. Trading stocks is buying shares in the hopes that they can be sold at a higher price shortly. At one extreme is GME’s case of Reddit users initiating a short squeeze, but the hype was momentary and irrational. However, investing considers a longer time horizon, and it is about buying a piece of a company with a strong outlook and an optimistic future. Typically, shareholders take into account a company’s financials and business model before buying shares in it. Investing is a more sustainable way to build wealth and achieve long-term gains.

The saga is also about a company that fails to innovate and keep up with the times. As the endgame for GameStop’s short squeeze is here, let’s see what GameStop could do next to survive.
Why is GME on the short selling list in the first place?
Investors typically trade stocks to capitalize on their upward price change. On the opposite, short selling is an investment strategy that speculates on and profits from declining stocks.

As GameStop was doing terribly in its core business and its stock was tanking, it was on its way to oblivion, and investors especially hedge funds like Melvin Capital and Citron, put the company at the top of the shorting list, betting aggressively against it.

GameStop buys and sells video games, consoles, and accessories in its 5,000 traditional bricks-and-mortar stores across 10 countries. While most video games companies have been moving online for years already, GameStop went the opposite direction and doubled down on its physical stores in 2019. Therefore, it is not difficult to imagine why it is experiencing declining sales and suffering from unprofitability for a good while now and has been hit hard by COVID-19.

What can it do to get out of the pit?
Based on our observations, we recognized some things that the sinking company might ponder.

1. Review and improve its business model to increase profitability
Being a Fortune 500 and S&P 500 company, GameStop is by far the world’s largest video game, consumer electronics and collectibles retailer. However, GameStop almost had to sell itself in 2019 after suffering a net loss of US$673 million in 2018 and US$470.9 million in 2019. Worse still, the unprecedented and disastrous COVID-19 caused GameStop to shut down almost all of its stores during lockdowns, dragging its in-store sales by around 17%.

It should concentrate sales efforts, and clear out unpopular products that are stacked on their clearance tables. In terms of managing costs, shutting down huge outlets is one of the options to cut out on rental expenses in major cities where real estate comes at a high premium.

2. Offer new services
Just like movies and TV shows on Netflix and music on Spotify, games are now available for streaming on online platforms. Cloud gaming subscription services like PlayStation Now allow gamers to stream some of their favorite titles without waiting on downloads. Game streaming lets players remotely access hardware on the service's powerful servers over the internet, and the actual games played run on that PC instead of the player’s hardware. However, a fast network connection is a must for game streaming, so that players’ inputs go through the service’s servers without latency and glitches. As the universal coverage of 5G is round the corner, it is only a matter of time before cloud gaming takes up a major part of the gaming industry. GameStop should discover new product offerings in this area in order to survive the next generation of gaming in the digital era.

3. Adaptability is key to business sustainability
The biggest problem of GameStop is that it does not proactively adjust business strategies to respond to challenges and changing consumer behavior. For more than a decade, many video game players have been shifting from buying game discs from physical stores to downloading games online. GameStop is largely oblivious to this trend and is constantly facing an existential threat despite attempting to expand into other areas such as used video games, devices, and digital products. Luckily for them, the latest console models PlayStation PS5 (except for the all-digital PS5) and Xbox Series X still have disc drives, so GameStop is still able to sell discs and consoles for at least a few more years.

The pandemic favors digital gaming, O2O, and e-commerce, but GameStop is very late to the game. Like most brick-and-mortar retailers, GameStop is struggling to fight heightened competition from online companies that offer new services such as gaming subscriptions provided by Microsoft's Game Pass, PlayStation Plus, and Xbox Live Gold. The monthly subscriptions allow players to download games on-demand or play any games that are available on the platform including new titles at a cheaper price than purchasing individual ones and get free downloads each month. Digital gaming is becoming easier and cheaper, and gaming technologies are evolving fast. GameStop would have to find ways to expand into the digital space to keep abreast with the times.

On 3 Feb 2021, GameStop announces the appointment of Matt Francis to the newly-created role of Chief Technology Officer. Francis was an Engineering Leader at Amazon Web Services and held senior-level technology roles at companies such as QVC and Zulily. Bringing more than two decades of experience in e-commerce and consumer technology to GameStop, hopefully, Francis would transform and improve GameStop’s e-commerce and technology functions to navigate through COVID-19. Better late than never, right?

The author is a Securities and Futures Commission licensee, and no part of the author’s compensation was, is, or will be, directly or indirectly, related to the specific material contained herein. The author does not personally hold the mentioned relevant shares.

The commentary, news, research, analysis, prices and other information published in this column can only be viewed as general market information, which is for reference only and does not constitute investment advice. Caelus Asset Management Limited is not responsible for errors, inaccuracies or omissions in the information, and does not guarantee the accuracy or completeness of the information, text, diagrams, connections or other items contained therein. The company shall not be liable for any special, indirect, joint or consequential damages caused by the materials, including but not limited to loss, loss of income or loss of profit.