Summary
GameStop tests critical support.
GameStop dives into non-fungible tokens.
The first obstacle for GameStop is competition.
In myweekly newsletter on Seeking Alpha's marketplace, I warned investors to avoid GameStop (NYSE:GME) stock in early December ahead of the company's third-quarter earnings report. The company has since announced a move into the Non-Fungible Token (NFT) space, and I will dig deeper into what that could mean for the company going forward.
GameStop tests critical support
GameStop Corp. was due to release its third-quarter earnings report and I warned my subscribers on the 8th December:
GameStop has earnings but there is nothing technically great about the stock right now. A drop to support near $100 is still possible with a possible low in 2022.
The stock has since dropped from $168 to $108 and is now looking at a test of the $100 level, which provided monthly support. Back in March 2021. If the stock fails here, then a move to the weekly support at $45 is possible.
GameStop dives into non-fungible tokens
Non-Fungible Tokens, or NFTs, have exploded in popularity over the last two years and the digital art pieces have been selling for millions of dollars, bringing a boom for the marketplaces that sell them. The digital artistBeeple sold an NFT for $69 million via Christie's auction house as the old school auctioneers of physical art embrace the digital world.
NFTs recorded over $12 billion in sales on the Ethereum blockchain in 2021, marking a stunning 17,864% year-on-year growth compared to 2020's $67 million, according to data from NonFungible.com.
GameStop stock rose initially on thenews but has turned bearish once more. As Seeking Alpha reported, "The Wall Street Journal reported... that 'people familiar with its plans' said moves were being made as part of a turnaround effort by Chief Executive Matt Furlong. Last month, Furlong said on GameStop's quarterly earnings call that the company was exploring ways of getting into NFTs and blockchain technologies." The report also said that the company was "working on deals with at least a dozen crypto companies that will include investing millions of dollars in those firms for the purpose of developing games that use blockchain and NFTs."
For GameStop, this is a timely move as the "play-to-earn" sector of the cryptocurrency space has been hot property in 2021. An example of this is the role-playing game, Axie Infinity, which saw its market capitalization soar from $40 million in January of 2021 to a high of $9.6 billion by November as the game saw great traction.
Axie Infinity has 2.8m daily active players and has seen $3.6bn traded on its in-house marketplace, with the highest price NFT being sold for $820K. For GameStop, there could be opportunities to tap into a successful game through its investment and drive those daily users back to the GameStop brand for other related, or non-related purchases.
In reality, GameStop's move from a physical retail brand had to happen and online-only games can be a great diversification that will likely end up dominating the company's business.
The "play-to-earn" model also rewards users for their engagement and that keeps them committed to the brand and spending their earnings in-house to scale up their rewards.
The first obstacle for GameStop is competition
GameStop will be effectively moving into a new sector and the first obstacle it will face is competition.
At present, the largest NFT marketplace is OpenSea, withDappRadar showing that the exchange had processed over $15bn in volume. Next is Axie Infinity, followed by CryptoPunks and NBA Top Shot.
DappRadar
The latter two are NFT collections and they do not have the same engagement as Axie's play-to-earn offering. For GameStop, the key will be to uncover an addictive game, but there is competition there also.
As the WSJ report said, the company was looking at investing "millions of dollars" in games and that would likely rule out investment in Axie. The cryptocurrency project already has a market cap of $4.4bn, which is already half of GameStop's $9.37bn valuation, which the blockchain project topped in November of last year.
The Axie project also has the deflationary issue to deal with as the project has 60 billion AXS coins circulating out of a maximum supply of 270 billion. What does it all mean for GameStop stock?
In the December third-quarterearnings report, the company continued to struggle. Sales were able to rebound from a pandemic-induced rout in 2020, but GameStop's losses widened further.
GameStop delivered net sales of $1.3 billion last quarter, which was 29% higher year over year.
The problem with that performance was that third-quarter revenue was $1.4 billion in 2019 and over $1.9 billion in the previous year.
Further, the launch of new PlayStation and Xbox gaming consoles in late 2020 was a driver of short-term sales for gaming hardware, with US gaming hardware sales surging 59% year over year, according to NPD. That means that GameStop may find it hard to keep sales elevated in subsequent quarters. A big shift toward hardware sales is also driving gross margins lower to 24.6% last quarter, down from 27.5% a year earlier. Operating expenses were also higher at 17% year over year. That led to a wider operating loss of $103 million in the last quarter, up from $84 million.
Management is stating that these losses are simply part of the company's turnaround strategy and we may see improvements in the year ahead. For the company's NFT move, it will have to tap into a successful game in order to drive substantial revenues. As noted, the Axie game has a strong following of 3.6 million daily users and GameStop would have to attract similar numbers and could offer promotions and drops of limited edition NFT pieces to start bringing revenues in from those users.
On the marketplace side, OpenSea is the big fish in the water with the exchange recently seeing amonthly record of $3.5bn in Ethereum sales volumes.
GameStop may not be able to catch the runaway growth of that platform, but it provides some insight into a market that could be a game-changer for the company if it gets the move right. The NFT space is already providing valuable revenue streams which are seeing explosive growth.
Conclusion
As a gaming, and now hardware retailer, GameStop is attempting a turnaround strategy and the recent third-quarter earnings are not showing anything to get excited about. The company is still trailing its pre-pandemic revenues and seeing pressure on margins, with operating losses growing.
Based on that performance, I wouldn't advise getting involved in GameStop and especially not in the short term however, a buy opportunity may be developing in the year ahead.
GameStop is unlikely to challenge straight-out NFT marketplaces, such as OpenSea, but the play-to-earn sector of the cryptocurrency industry is a perfect fit for the gaming retailer. Investment in blockchain gaming developers has been muted, which could add value in the form of equity stakes. More importantly, if the company can unearth a new gem like the Axie Infinity game, it could drive millions of users into a model that rewards them on engagement. That would provide opportunities to leverage those users into other GameStop offerings and also add earnings in the form of NFT drops or promotional offers at its retail division.
GameStop currently trades at only 1.5x current earnings and in the longer term, a new revenue stream could add to the market cap and bump up the company's price ratios. There is still a chance of further losses if the $100 level doesn't hold and investors could look below that for a base to get involved.$GameStop(GME)$
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