GameStop
Gamestop first began as an offshoot of Babbage’s, and initially launched in 1999 with a small collection of stores in malls. A brief ownership by Barnes and Noble gave GameStop some opportunity to separate – once it went public, Barnes and Noble owned the majority of its stock, but they distributed it to the folks who also owned stock in their company when they left. As a result, Gamestop then owned the majority of its shares, and became independent.
Gamestop is obviously different from Best Buy or Radio Shack. It’s games-only. It thrived in an era where games were good, but internet was inconsistent. Game consoles were their bread and butter! They didn’t need to worry about anything but disks and trading games, because online games just couldn’t compete. It was a profitable model for quite some time.
Other companies focused on rentals over trade-ins, primarily GameFly and Netflix, and smaller individual stores where GameStops didn’t exist yet. GameStop’s growth correlated strongly with the increasing popularity of console games – owning a disk was preferable to renting one from a service like GameFly, but it was expensive. Triple A games could run up to 60$, and that would shuffle much of GameStop’s market to the substitutes – trade-ins and store credit became the work-around. Customers were happy. GameStop had a good reputation with both vendors and customers.
However, around 2016, things began to change.
2016
After a series of acquisitions and successful growth years, Gamestop’s growth began to decline, and then reverse – consoles could now come with live services, so disks were less necessary. Even worse, big ticket games were switching from a physical disk to a downloadable file, and the internet was generally good enough to allow players to download games overnight. Rural areas were still relying on disks, but the rural market wasn’t nearly big enough to cover the amount of people who were leaving disks behind.
Their game trading system encouraged buying, but since any one game was often worth more money on eBay than in-store, there was no reason to trade into Gamestop except to get rid of old disks without throwing them out. GameStop got the chaff, eBay got the wheat.
Customers also often found Gamestop’s trading system encouraged bad behavior by employees – they were expected to complete a certain number of trade-ins per period to hit a quota, and employees in slow stores found it difficult or impossible to hit their numbers honestly.
They weren’t selling new disks, and while they were making profit on returned disks via their Circle of Life system, they weren’t making enough. Consoles and exclusive pre-releases became their primary moneymaker, but with disappointing pre-release after disappointing pre-release (and pre-orders), they were losing their footing via attrition.
Next best option: start acquiring other companies…? A couple of attempts of that later, and GameStop’s found itself in debt. Acquiring a company means nothing if there’s no plan to fix it in a way that provides profit, you’re just buying another sinking ship. If you’re buying a successful company and ousting leadership, you can turn it into a sinking ship! Think of Yahoo’s acquisition of Tumblr. Starting value was in the hundreds of millions, ending value was 3 million. No plan to fix issues combined with a poor plan to get rid of features that users liked = no profit. GameStop shot itself in the foot a couple of times doing this, and doing this has signed death warrants for other companies all by itself.
2018
Every new announcement of an Xbox or PS4 live service stripped away customers and market share. The Xbox Game Pass announcement alone snipped 8% off of their stock price in 2017, and it only got worse. Stock prices were depressed, and Gamestop couldn’t find a solid buyer – their attempt to get acquisition-ed failed because they weren’t producing enough revenue to fund their own purchase. They’d be a loss, and there was no way to convince other companies that they wouldn’t be. This is also the year they lost over half a billion dollars, the worst in their history. The company was forced to eliminate their dividend, making their stock less appealing.
From there it was a downhill slide. Gamestop was forced to do things that injured its future odds of survival. CEOs came and went, personal reasons and illness flare-ups prevented a cohesive line of succession from forming. Customers complained about the trade-in system, and GameStop employees complained about how the scheduling left them as perma-part-timers despite years of loyalty.
2020
It’s 2020, and COVID-19 hits. Gamestop has an opportunity to get back on top, and they try – they have GameStop-exclusive releases like new Funko pops, the Nintendo Switch preorders bump up their performance temporarily, and if they spin it right, they could perhaps convince the public that their stock is improving. It is seeing little waves, but not the growth it needs to get loans and the like.
It wasn’t being artificially suppressed, yet, but things still weren’t looking good. Stock prices fluctuated some, usually below 20$ or so per share. Without a dividend, a poorly aging games company isn’t looking like a good spot to invest. And yet, GameStop improved slightly. Losses slowed down a touch, juuuust enough for a retail stock trader to see it and thing “Heh, maybe I’ll buy some GameStop. As a joke.” It’s not a joke anymore.
GameStop Now?
GameStop hit the news recently because hedge funds attempted to short it to death. The process of ‘shorting’ a stock often involves doing shady things that aren’t quite illegal to lower the stock price. Maybe hedge-fund affiliated folks tell the market that, in their professional opinion, GameStop’s not going to recover. Maybe they automate buying and selling at periods where they know retail traders are going to lose confidence. Or maybe they even get popular stock apps like Robinhood and the like in on it!
The outside public has no idea this is happening, they just see a floundering games company slowly asphyxiating to death.
By getting certain big buyers and personalities (like Citron) to show a lack of confidence, they lower the price, and make a profit when they buy back the shares they’ve borrowed. Stocks can be dirt-cheap and a company can still make it, but the stock price signals a level of faith in the company: stocks that are ‘too cheap’ mean that brokers don’t value it, usually because they don’t think it’s going to bounce back, which then means that banks are reluctant to loan them money – so they can’t invest in things that might fix their problems.
Bad stock price = no loans = no fixing problems = eventual death of the company, barring a miracle.
Luckily for GameStop, a miracle is essentially what happened. Somebody saw through all the garbage back-channel trading and realized that GameStop had been oversold. Overselling is also legal, but usually it means that the company’s sold too many of it’s shares – it’s not suspicious in and of itself. Here, hedge fund itself sold more shares than it could afford to leverage. It had oversold so badly that a couple of ‘whale buyers’ grabbing a % or two of shares made the price go up, and people noticed. It should go up, but it shouldn’t have gone up that much. By buying an absurd amount of shares for dirt cheap, they sucked up the shorted supply – and the price rocketed to a whopping 483$ at its peak, from a low of three dollars just a few weeks earlier.
Now, GameStop has some time to plan ahead.
And plan, they have! GameStop plans to pivot into selling gamer gear beyond the regular consoles and games they ordinarily sell, effectively allowing them to fill a niche left behind by the death of Fry’s Electronics and Radio Shack. Amazon is still an issue, but Amazon’s generally unable to deliver parts in the same day. With their new commitment to price-match, suddenly Amazon’s at a disadvantage! Same day parts, less aggressive sales tactics, and new channels to sell games.
GameStop’s got a chance again. Thanks, retail stock traders.
https://www.nasdaq.com/articles/gamestop-oversold-2019-01-29
https://www.wsj.com/articles/gamestop-eliminates-dividend-as-sales-fall-11559683871
https://screenrant.com/gamestop-price-matching-first-improvement-new-leadership/