The use of video games is rising to record highs, enriching game developers and console manufacturers and increasing sales for e-commerce platforms. About the only part of the industry that has not benefited is retail chains like GameStop, which still rely on physical sales in a world that is rapidly transitioning to digital transactions.
Until now. GameStop’s share is soaring to comic levels as part of an ongoing frenzy organized by smaller investors on Reddit and TikTok. As a way to get back to the hedge funds that are gradually reducing the profits that GameStop has made, these investors have teamed up to buy the company’s shares and increase their value. This created a ‘short press’, forcing the hedge funds that were shorting GameStop’s shares to buy more and more shares to cover their losses – around the stock, as these vigilant investors call it, ‘to the moon’ ‘to send.
The share price peaked at $ 483 this morning, an unprecedented 12,000% higher than the $ 4 price a year ago. It has been swinging wildly ever since because Robinhood and other stock trading platforms have blocked investors’ ability to buy GameStop shares, but the value remains much higher than GameStop’s underlying financials suggest it should be.
This was all only possible because many of GameStop’s deeply invested investors were so confident that the business was heading for a collapse, that they had invested billions in the downfall. And until recently, it was quite a smart bet.
The history of GameStop
GameStop, founded in 1984 as a software retailer, switched to games in the early 2000s and was extremely successful, selling consoles, games and accessories to consumers. At its peak around 2011, the company generated nearly $ 10 billion in revenue per year and had 6,700 stores. But by 2019, GameStop had generated only $ 6.4 billion in revenue (pdf). It laid off hundreds of workers before the coronavirus pandemic and planned to close more than 1,000 stores in an effort to save costs.
This is because video games are increasingly being bought and sold online instead of in stores. Players can download games to their consoles and computers – or even stream them – without buying physical disks. The growing popularity of mobile and cloud games has made the once essential trip to the store obsolete. GameStop is at the forefront of video games – a relic of old consumer habits that barely transcend into a digital world.
While digital sales also include content outside of the games themselves, such as add-ons and in-game currency, the games are also increasingly being purchased digitally. Both Sony’s PlayStation 5 and Microsoft’s next-generation console offer digital releases, which do not even come with a disk drive. Sony said this year More than half the units it sold in 2020 were digital.
Some users of the WallStreetBets subreddit argued last year that GameStop share was actually undervalued. Game consumption was higher due to the pandemic, and while PlayStation and Microsoft were on the verge of releasing new consoles with only digital options, GameStop still made a kill on the sales of the consoles. Both factors made GameStop’s situation a little less dire than the position of the hedge funds implied – at least in the short term.
Similar thinking led activist investor Ryan Cohen to invest heavily in the company in 2020, hoping to lead his board of directors to consider a new digital first direction for the company. “GameStop must evolve into a technology enterprise that delights gamers and delivers extraordinary digital experiences – not a video game retailer that over-prioritizes its brick-and-mortar footprint and stumbles into the online ecosystem,” he said in November. Written an SEC filing.
So maybe there is still hope for GameStop, even after this madness has ended. The following steps are unclear: it could use the company’s temporarily exaggerated value to pay off any outstanding debt and invest in new initiatives. Or it can do business again as usual. But the business was fading.