GameStop could flare before snuffing out
The next generation of video game consoles is on its way, which is why I think GameStop Corp. (NYSE:GME) might get a bit more air underneath its wings. I am not saying it is going to become hugely profitable, but when the consoles start coming out, good news might flow out of GameStop Corp. (NYSE:GME). The share price has proven surprisingly resilient despite GameStop losing money. I once pondered whether there was room for Gamestop in today’s market, and I now don’t think there is.
GameStop Corp. (NYSE:GME) lost almost $350 million in the last 12 months. That is net income TTM, which means that it’s as of the last earnings report, which was in October. The company has no debt, but only $366 million in cash. I expect losses to continue, though the next earnings will have the holiday season factored in. Even if they look good, the long-term trend is troubling. Digital sales of games are increasing rapidly. The last physical PC game I bought was StarCraft 2: Wings of Liberty in 2010. I got a digital pre-order for Heart of the Swarm.
Publishers are also pushing back against used games, which delivered massive margins in days yonder. Forget the plans to have certain content require a purchase of a new game, now there are plans to tie a game to a specific console though that might not be implemented. Publishers are going to do everything in their power to make sure the concept of used games dies and remains buried.
Most game sales are going digital, whether through a platform like Steam or directly from the publisher. Used games are disappearing. Physical games and equipment have low margins, and face stiff competition from Amazon.
Nix the middleman, go with publishers
I am an Activision Blizzard, Inc. (NASDAQ:ATVI) game and stock fanboy. I love their games, and I think their stock is great. I might be position-free at the moment for various life-based reasons, but Activision Blizzard, Inc. (NASDAQ:ATVI) would be right on top of my “to buy half, write covered calls, and write cash-secured puts for the other half” list. I think I have mentioned that Activision has over $4 billion in cash, but just in case I’ll mention it again. Also, it is the only video game company to have a dividend.
Heart of the Swarm is upon us. It will bring in a lot of revenue. Activision Blizzard, Inc. (NASDAQ:ATVI) will probably have another Call of Duty game around the holidays, and that will bring in a lot of revenue. Skylanders as a franchise crossed the $500 million revenue mark.
Activision Blizzard, Inc. (NASDAQ:ATVI) is jumping into the mobile space with the launch of the Activate platform with Skylanders at the tip of the spear. I also think that Disney Infinity will bring more attention to Skylanders and help increase revenues. Just like how the Monday Night Wars in the 1990s actually created wrestling fans instead of just dividing existing fans up, though division happened later and one company folded. Initially, viewership grew as a whole because of the competition. I think Activision Blizzard, Inc. (NASDAQ:ATVI) goes higher from these levels.
Best Buy Co. Inc. (NYSE:BBY) does have a chance
Back to retailers who might be finding themselves irrelevant. I think Best Buy Co., Inc. (NYSE:BBY) does have a good chance of clawing itself into relevance. Best Buy Co., Inc. (NYSE:BBY) has a less specialized business than GameStop Corp. (NYSE:GME), but is facing stiff competition from Amazon. Specialty retailers would normally be better off, but GameStop Corp. (NYSE:GME) faces direct existential threats to its business that are unique to much of the entertainment industry, like digital media and streaming.
Best Buy Co., Inc. (NYSE:BBY) needs to make serious changes. One thing I can think of is becoming more like an electronics gallery, and carrying more products that have custom specifications instead of general one-size fits all stuff. Examples would be high quality cameras or speed cameras instead of only ten standard digital cameras. Best Buy Co., Inc. (NYSE:BBY) will be carrying the Leap Motion, exclusively I believe. Best Buy will also need to grow its online business.
Year-to-date the stock is up over 70%. Not sure it deserves that much of a gain yet. It is taking steps, but certain changes are double-edged. The price match program, while increasing sales might drive the company into lower margins or deeper losses. Best Buy Co., Inc. (NYSE:BBY) only recently became unprofitable and its most recent quarter was profitable.
Its losses for the previous 12 months are around $250 million, which is not terrible considering the $1.8 billion in cash. Also, those are earnings, but operating cash flow is $1.422 billion over the same period. Its debt-to-equity ratio is 0.62, which gives the company some flexibility. It also has a 3.7% dividend yield, and the next dividend is in April 2013. The company is not hurtling towards bankruptcy, but concerns remain. Best Buy is a high-risk play and with the stock having risen so much, I wonder if there is any near-term rewards.
Conclusion
I always like Activision Blizzard, Inc. (NASDAQ:ATVI) for making awesome products that everybody wants. The Heart of the Swarm launch party around the world was amazing. I watched the live stream. Best Buy is a long shot for those who love to take risks. The reward is not as high as it could be, since the stock is already up so much. However, Best Buy is not posting heavy losses so it did not take much of a beating. I worry about GameStop Corp. (NYSE:GME) and I would stay away until something that can carry the company in the long-term shows itself.
The article Retail Middlemen Vanishing Into the Internet originally appeared on Fool.com and is written by Nihar Patel.
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