Does GameStop have a path to dominate the online market?

Written by: Jayson Derrick
February 28, 2021
  • GameStop's stock traded above the $100 per share level once again.
  • The company will face investor pressure to execute on a digital transformation plan.
  • New board member Ryan Cohen may be up to the task.

Video game retailer GameStop Corp (NYSE: GME) has seen its stock reclaim the $100 per share level and if management is now under pressure to convince non-Redditors its stock is worth investing in, The Wall Street Journal reported.

Many hurdles to overcome

GameStop’s relevancy as the go-to destination for video games has been declining prior to the COVID-19 pandemic. The company faced new competition after console makers Microsoft and Sony started to include hard drives in their devices. At the same time, Amazon.com and other online retailers made a major push into the video game market

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For the first time ever, gamers can download a game directly to their console. GameStop did its best to remain relevant by emphasizing its value proposition to consumers. Most notably, GameStop paid store credit to anyone that wanted to trade in their old games.

GameStop also invested in the margin-rich collectables and accessories market.

While this proved to be sufficient to stay in business, revenue has been impacted as many consumers chose the convenience of either downloading games or buying on Amazon.

Unfortunately for GameStop, the headwinds have merely accelerated in recent memory. Games that are free to play like “Fortnite” and “League of Legends” surged in popularity and gave gamers an alternative option to expensive titles.

GameStop is also up against some Wall Street analysts that have little to no faith in its outlook. Most recently, Loop Capital Markets analyst Anthony Chokumba said his prior $10 price target on GameStop’s stock is overly generous.

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New board member has a plan

Ryan Cohen founded the online pet food and wellness store Chewy. He successfully convinced millions of customers to shop online in one of the few industries where physical retail remained dominant. He will be counted on to lead GameStop’s digital transformation.

Cohen bought a 13% stake in GameStop in 2020 and was named to its board of directors in 2021. Two new members that are aligned with Cohen also joined the board, giving the new shareholder even greater influence.

According to WSJ, Cohen is now taking a direct role in internal C-level hiring decisions. Just last week, the board ousted CFO Jim Bell and a few weeks prior hired its first-ever technology chief, Matt Francis.

Management must deliver

There is no other way around it: GameStop’s management has to impress investors and time is not on its side.

The company reported a loss in five of the past six quarters but already said it expects to report a profit in its January-ending quarter, according to WSJ.

In addition to expectations for a credible strategy to transform into a digital giant, the company needs to do so at a reasonable cost. GameStop ended its prior October-ending quarter with $445 million in cash and cash on hand, up from $290 million in the year prior. If needed, it can sell another $100 million worth of stock.

After that, there might not be any lifelines, power ups, cheat codes left.