One thing everybody seems to have an opinion about these days is GameStop. The video game retailer is one of this year’s hottest stocks, roughly a 10-bagger in 2021 alone. Bulls think it will keep moving higher as the country warms up to the digital evolution of the throwback strip mall chain. Bears think that it’s a helium-stretched balloon waiting for a pin to pop.
Both sides can’t be right, at least in the long run. In the end it all boils down to which trajectory you believe the chain will follow at this point. Bulls will argue that Amazon.com is where it’s going given the fresh faces that GameStop has brought in to make it an e-commerce star against the backdrop of its shrinking physical footprint. Bears will argue that GameStop is the next Blockbuster Video, a brick-and-mortar institution dedicated to physical media that’s being inevitably replaced by consumer-direct digital delivery. Both sides may have compelling arguments, but perhaps the more reasonable optimistic scenario is none other than Best Buy, a chain that also seemed to be on the brink of extinction before new leadership turned the consumer electronics superstore concept around.
Wow, what a difference
Blockbuster is the last thing that GameStop would like to be in the next couple of years, but the similarities are there. Blockbuster was the leader in its specialty retail niche, which in its case was renting out VHS tapes and then DVD and Blu-ray discs. Blockbuster tried to take on disruptors when discs were being rented by mail or out of vending machine kiosks, but the final fight took place on the digital battlefield, where it was unable to compete.
Under new ownership, Blockbuster shuttered stores and launched an on-demand platform that failed to take off. The retro brand became a liability rather than an asset. It failed to scale in a way that could give it a fighting chance in the new future, where movies and TV shows were being summoned digitally through improving in-home connectivity. Bears see this as the logical trajectory for GameStop. Are they right?
Bulls can point to Amazon as the market-thumping role model. Amazon.com was and continues to be a leading retailer of physical video games and gear. The secret sauce here is that it has spent more than two decades perfecting the fulfillment process for speedy delivery with a nine-figure audience of Prime loyalty shoppers who turn to Amazon first when it’s time to shop for anything. Amazon’s also a leader in e-sports through its Twitch platform, where the world’s top gamers monetize their streams to growing viewers. Last fall it unveiled Luna, a cloud-based gaming service that will compete with existing platforms put out by other tech giants.
In a dream scenario, GameStop keeps shutting down stores — it has shed 12% of its storefronts over the past year — and becomes leaner so it can compete with Amazon in e-commerce. Trying to take on Twitch as well as the more crowded realm of cash-rich cloud-based gaming services will be more challenging, but GameStop bulls feel that (unlike with Blockbuster) the retro charm of the brand will be an advantage instead of a disadvantage. Are they right?
Talk about what’s possible
Best Buy is a name that doesn’t get mentioned a lot by those sizing up GameStop’s retail persona, but it’s not a bad choice to play the role of the Ghost of GameStop Future. When rival Circuit City liquidated, all eyes turned to Best Buy as the next consumer electronics chain to falter. Best Buy also competes with GameStop as a seller of video game systems, software, and accessories.
The unlikely turnaround at Best Buy began in 2012 when its CEO had to step down following allegations of his having an inappropriate relationship with a fellow employee. Best Buy brought in an outsider who brought in some of his associates to help steer the ship in a new direction — something that recalls GameStop circa today — and this was when CEO Hubert Joly unleashed the Renew Blue initiative.
Initially mocked by the masses, his approach to beefing up his fading concept’s e-commerce efforts proved revolutionary. Instead of seeing his network of stores as a problem in a digital world, he made them an advantage. He invested in employee training to make his staff smarter. He revamped Best Buy’s archaic inventory system. He used his stores to enable locals to pick up online orders and to expedite delivery in a way that Amazon couldn’t match, and that’s pretty much the model for the real-world chains that are thriving these days. Best Buy also raised the bar by renting out space in its store for brands, even if the “store within a store” call in the Best Buy playbook may not work in small GameStop locations.
GameStop is far more likely to become the next Best Buy than the next Blockbuster or Amazon. This wouldn’t be a bad compromise for GameStop’s destination in the ranks of retail stocks. Best Buy stock is a 12-bagger since the start of 2013, even though bears will argue that GameStop is already commanding a sales multiple four times greater than where successful Best Buy is today. The valuation concerns are real, but we can’t dismiss the GameStop model itself when Best Buy is proof that fresh thinking can turn a broken concept around.