Reseller of video games and accessories Game Stop (NYSE: GME) stock had clipped its wings since the start of the 2021 meme stock enjoyment. Today, the company continues to desperately transform its business model as it loses ground to digital gaming day by day. Major console makers PlayStation by Sony (NYSE: SNE) and Microsoft (NASDAQ:MSFT) Xboxes have created all-you-can-play gaming memberships such as PlayStation Plus and Xbox Game Pass that allow gamers to download and stream literally thousands of games on previous consoles for a monthly fee. This completely eliminates the need to go to GameStop to buy an old favorite game to play. The only drawback is the sheer amount storage needed to store all those digital copies, which can be over 100 gigabytes per game. Digital gaming is gaining more console players due to its convenience, access, and growing communities. It’s no surprise given that PC games have completely migrated to digital purchases rather than buying physical ones. Mobile games are mainly downloaded digitally via Google Play Store (NASDAQ:GOOG) or Apple iTunes (NASDAQ: AAPL). A dying business model and low expectations heading into the holiday season could leave complacent bears vulnerable to a different potential Short press.
Set short pressure?
Short squeezes usually occur when a combination of factors converge before a surprise catalyst. These factors include a multitude of bad news, weakening fundamentals, high short-term interest, declining liquidity due to falling volume and complacent short sellers. All elements seem to add up with GameStop as their Q2 2022 revenues were weak and the conference call ended abruptly with no Q&A session left, leaving more questions than answers. Bad news can be good news for bears but can also set a trap if they become complacent. Short-term interest rates have fallen to just 17.5%, which is still considered high for most stocks, but pales in comparison to the alleged short-term interest rate of 140% prior to the historic short squeeze in 2021.
The next blockbuster video
In addition to stiff competition from retailers such as Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), Target (NYSE:TGT)and Best Buy (NYSE: BBY), GameStop faces a much tougher threat that could undermine its business model. Just as the once-dominant video and DVD rental chain Blockbuster Video fell by the wayside Netflix (NASDAQ:NFLX) and its digital streaming service, GameStop’s future looks bleak as gamers continue to migrate to buying digital video games rather than buying physical ones. Just as digital helped kill Blockbuster, digital is killing GameStop. With improved broadband capacity and speeds, a game can download a game in minutes, which a few years ago would have taken hours. This convenience helps more gamers continue to migrate to digital consoles. PC gaming has already moved almost entirely to digital purchases and downloads, and the console industry is following in its footsteps. It doesn’t help that the video game industry has been waving in 2022 amid cuts in personal discretionary spending, as shown by NVIDIAs (NASDAQ: NVDA) warning and Roblox’s (NASDAQ:RBLX) falling bookings.
Digital vs physical video games
The argument for streaming and downloading video games digitally versus purchasing physical copies from GameStop or online is one that consistently favors the digital side. The best argument for still buying physical copies of video games is that they can actually be resold, while digital games cannot be transferred or resold. Most physical video games still need to be installed on the video game console and then the CD inserted to play the game. Constantly changing CDs on the game console can be a pain, especially since different CDs are placed in different boxes and more clutter builds up with each box. Physical games can be resold and also have the potential to become collectibles over time as they become scarcer. The collectible video game market continues to grow, provided they are kept in high-quality conditions. This doesn’t help GameStop though, as their used video games are definitely worse for wear and tear and showing.
Still in red
GameStop has only had one profitable quarter in the past two and a half years. On September 7, 2022, GameStop released its fiscal second quarter 2022 results for the quarter ending July 2022. The company reported earnings per share (EPS) loss of (-$0.35) excluding one-time items versus estimates from consensus analysts for a loss of (-$0.42), beating estimates ($0.07). The company reported a net loss of (-$108.7 million) compared to (-$61.6 million) due to transformation efforts and investments. Revenues fell (-4%) year over year (YoY) to $1.14 billion, below consensus estimates of $1.27 billion. Collectibles segment revenues increased to $223.2 million, up from $177.2 million in the prior year period. Cost-cutting efforts led to a sequential decrease (-14.3%) in selling, general and administrative expenses to $387.5 million. Inventory grew to $734.8 million from $596.4 million a year ago, helping the company stay ahead of the game in meeting customer demand amid supply chain headwinds. The company upgraded and modernized its systems by implementing SAP. The company launched its NFT marketplace that allows gamers, collectors, creators, and consumers to buy, sell, and trade NFTs. Incidentally, the head of its blockchain division Matthew Finestone left the company on September 12, 2022. GameStop ended the quarter with $908.9 million in cash and cash equivalents with no debt.
No guidance, no questions, no answers… Click!
GameStop CEO Matt Furlong commented on the conference call: “As far as the outlook is concerned, we are not giving any formal guidance at this time. However, it’s worth noting that our continued involvement with key vendors positions us to receive a wider range of next-generation consoles in the coming months. I want to finish by emphasizing that we are working on something that has never been seen before in our industry, which is to transform a legacy brick-and-mortar retailer into a technology-led organization that meets customer needs through stores, e-commerce properties in both digital marketplaces and new online communities. Our path to becoming a more diversified and technology-focused company is one that clearly carries risks and will take time. Having said this, we believe GameStop is a much stronger company than it was 18 months ago. They didn’t answer any questions and abruptly ended the conversation. They totally failed to address the elephant in the room, digital gaming. There were no answers as to how GameStop could compete with digital gaming, which completely bypasses their business model with DTC from game publishers and console makers. This may have further encouraged short sellers to continue.
FTX egg on his face
GameStop announced its partnership with FTX.US, intended to introduce more of its customers to FTX’s digital asset marketplaces. They will sell FTX gift cards in stores and be GameStop’s retail partner of choice in the US. Since then, FTX has collapsed amid allegations of massive fraud, theft, hacks and filed for Chapter 11 bankruptcy on November 11, 2022. There was a “hack” of $600 million missing crypto and a balance (-$8 billion) on the books. US crypto exchange Coinbase Worldwide (NASDAQ: COIN) has denied any intention to buy FTX.US.
Weekly descending triangle chart
The weekly candlestick chart indicates a descending triangular pattern consisting of lower highs and flats converging at an apex trigger breakdown point below $23.42. The pattern started in August 2022 and will eventually lead to a conclusion where the stock breaks up to retest multi-year lows or squeeze higher when it breaks through the descending upper trendline above $33 and accelerates on the weekly market structure low (MSL) trigger above $37.12. The 20-period weekly exponential moving average (EMA) is down, acting as the immediate resistance at $28.85 with the weekly 50-period MA resistance at $31.18. The weekly stochastic has bottomed out and is trying to bounce up through the 20 band, which could trigger a short squeeze as volume picks up. So far, since August 2022, the volume has been relatively low, which is a harbinger of complacency.