Videogame Sales Are Fading and It’s Crushing GameStop

GameStop may need a new start. The videogame retailer released details about its holiday sales Friday, and they weren’t pretty. It’s yet another sign of the eroding business for physical games.
Sales at GameStop fell 16.4% in the last nine weeks of 2016, the company said, compared with the same period a year earlier. Shares of GameStop tumbled 9% on the news, to $22.50.
All sides of the gaming business contributed to the decline. Even the hot new Nintendo NES Classic device couldn’t make up for big drops in Sony’s PlayStation 4 and Microsoft’s Xbox One console sales.
And the company struggled to sell new video games “due to difficult comparisons to titles launched a year ago,” according to a press release. But it’s not just that some big 2015 games did well. The 2016 versions -- like Call of Duty: Infinite Warfare, released in November -- did particularly poorly.
GameStop shares are down 16% in the last 12 months. Investors are paying just six times estimated earnings for the stock. That price-to-earnings ratio is 66% less than what the typical big stock gets.
There’s good reason for the skepticism. Even though 2017 is expected to bring a better slate of games, the challenges facing traditional game retailers aren’t going away. It’s tough to get people to buy physical games in stores these days when they can play games on their phone or download titles directly to their consoles.
Stores like Target and Best Buy suffer from the same game problems, but they sell plenty of other items too. GameStop needs to distance itself from all this gaming.
The good news for GameStop: It has growing non-gaming businesses. The company has had success selling Apple products through its Simply Mac stores, prepaid phone plans through its Cricket Wireless stores, and collectible items like Pokémon memorabilia.
These areas have their own challenges -- Pokémon won’t be cool forever, and sales of iPhones, iPads, and Macs all took hits in the latest quarter – but non-gaming businesses may have made up 40% of 2016 earnings. This is the sort of diversification the company needs to prioritize.
Meanwhile, there could be one more hope. Last night, Nintendo announced that its latest console, the Switch, will go on sale on March 3 for $299. A successful launch could provide at least some relief for GameStop shares.
Big Picture: GameStop had a dismal holiday season, underscoring the problems facing traditional game retailers.