Are You Seriously Betting on GameStop's Turnaround?

Many brick-and-mortar retailers have been struggling because of the boom of ecommerce. Shares of companies like GameStop (GME) are trading near 52-week lows and many investors see this as an opportunity to bet on its turnaround.

While shares of GameStop are trading at beaten-down levels, I don’t think betting on the company’s turnaround is a good idea. GameStop’s business model is broken and I highly doubt that it will be able to reinvent itself to propel a turnaround.

GameStop’s struggles are evident by the company’s quarterly results.
GameStop missed the analysts estimate widely when it reported its Q3 earnings earlier in November. GameStop reported revenue of $2.02 billion, down 3.6% on a year over year basis and roughly $120 million lower than what analysts were expecting. Same-store sales dipped 1.1% year over year, fueled by a 20.4% dip in new hardware sales and a 9.3% dip in new software sales. EPS came in at $0.54, down from $0.57 in Q3 FY2014, and $0.05 lower than the consensus.

GameStop sales have benefited a lot from the latest console cycles, however the company’s business model is broken and it will continue suffering. The gaming segment accounts for the majority of GameStop’s sales. But with console gaming shifting to the digital platform, GameStop should fall further.

Although physical discs still account for the majority of sales, the next generation of consoles will see a strong increase in digital downloads. Over the next few years, physical disks will become obsolete and will be replaced by digital sales. Obviously, GameStop can’t survive in such an environment, which is why I think the stock is not a turnaround candidate. In fact, I think investors should short GameStop as its business will slowly become outdated.

GameStop’s troubles are also evident by the company’s guidance for the upcoming quarter. GameStop is projecting comparable-store sales to be in the range of -1%-6%, while EPS is expected to be between $2.12 and $2.32, a lot lower than the consensus of $2.37.

Conclusion

GameStop may be trading near 52-week lows, but the company’s business model is broken and it is not a turnaround candidate. In fact, I expect GameStop to continue struggling in the coming years, which is why it would make sense for investors to short the stock. Falling sales and earnings along with weak guidance clearly shows that GameStop’s business is slowly becoming obsolete. So, while the stock may be near 52-week lows, I think it is a great short candidate.
Published on Jan 29, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

Posted in ...