- Will Gamestop Buy A Digital Download Game Free
- Gamestop Free Download Games Pc
- Will Gamestop Buy A Digital Download Game Pc
- Will Gamestop Buy A Digital Download Game Free
- Gamestop Digital Download Xbox One
Tired of that copy of Call of Duty: Black Ops you downloaded on PC? GameStop might buy it back from you someday soon.
Aug 2, 2011 - GameStop Launches New In-Store Digital PC Game Purchase Method. Digital PC version of Deus Ex: Human Revolution at GameStop will. GameStop Digital Download - Epic Fail - $60 Credit? Don't buy the game through the website! It won't let you use your credit, and people are saying the free 'Xbox One' version isn't working via this way for some reason! I bought the day zero digital download game preordered, it is now 9:26 am EST on 11/3/14 and I have yet to receive a. The key damage that digital games do to the company is in the fact that a digital game cannot be traded in, robbing GameStop's trade-in business and keeping customers out of their stores.
The video game industry is in upheaval. Console makers are staring down a future where they’re replaced by mobile and streaming devices, while game makers rush to capitalize on growing markets like social gaming. And even as they rush to those markets, that apparent fiscal security seems all too fragile. Just look at Zynga. No player in the broader video game business is as imperiled as GameStop though. This is a retail empire whose entire foundation is based around cutting out the middlemen of game designers and publishers by buying used products and selling them back for massive profits. GameStop isn’t huge because people like buying video games like Call of Duty. It’s huge because people like buying Call of Duty for $55 instead of $60 and GameStop is willing to sell them a slightly used copy it bought from someone else for just $35.
How does that business survive in the changed game market though? How does it adapt to digital distribution, a model that will see its business turned into the middleman by developers and publishers that can sell their product directly to the customer.
GameStop says that its business will be kept alive by selling consoles and other devices. After all, people need a machine to play video games on. Vouchers for digital downloads and credit at digital retailers like Steam are also increasingly a focus for the company. That won’t be enough though. GameStop lives and dies by the sale of its used goods. Paul Reins, GameStop CEO, told people gathered at a refurbishment center in Texas that his company will get in the business of selling used digital games.
“It’s very interesting. There are some technologies out there in Europe, and we’ve looked at a couple that are involved,” said Raines, “We’re interested; it’s not a meaningful business yet. Right now we’re not seeing that as a huge market, but I think we’re on the leading edge. There are a few companies, a few start-ups, out there that we’ve talked to that are doing this.”
Who are these companies that GameStop is watching with a careful eye? It won’t say in particular since it doesn’t want “competitors rushing in.”
Used digital game sales have been rumored on Steam and other services for months now. The trade back business is a key source of revenue in the video game industry and the disappearance of physical goods will leave a void. It has to happen sometime, but how remains a mystery.
GameStop (GME) shareholders are languishing after five years of miserable stock performance. Shares are down over 75% from their 2013 levels and short sellers have been piling up, reaching nearly 40% of the float.
Anecdotally, many bears are professing that GameStop is the next coming of Blockbuster and that investors should get out now before the inevitable decline to zero. There are certainly some strong points to that argument including increased competition from Amazon/Ebay/Walmart and the threat of digital downloads squeezing GameStop out of their core business.
If GameStop had excessive debt and/or razor-thin profitability, I might buy those arguments and avoid the stock. However, the company's financials have held up much better than its stock over the past five years. GameStop has zero net debt, a credit rating one notch below IG, consistent ROE of 15+% (excluding the write-off to Technology Brands in 2017), and free cash flow in excess of $300 million in each of the past ten years.
When those fundamentals are compared to an EV of just $1.36 billion, I believe that GameStop presents a unique investment opportunity in today's environment of lofty valuations. Even if GameStop gets hit hard by customers switching to digital and their margins are squeezed by competitors, it appears reasonable that investors could still get a lot of their investment back through dividends/buybacks and that the strong balance sheet would prevent the stock price from falling too low. It would take an extremely rapid decline in financials for GameStop to be overvalued at $13/share, and if the decline is slower there could be significant upside. I will discuss a few notes below.
Economics of Core Business
As shown below, GameStop operates in several different segments. Of these, perhaps the most important is pre-owned as it generates the most profit and brings traffic into the stores. Pre-owned gross profit was down 6.5% YOY in 2017.
The two major threats to this core business of GameStop's are competition in physical trade-ins and replacement by digital downloading.
Competition
GameStop has a number of competitors that go up against them in pre-owned sales, including Amazon, Ebay, Walmart, and Best Buy. There are several factors that customers are looking for when they go to trade in games, including trade-in value, time efficiency (how long does it take to get new games), and customer service (how knowledgeable/helpful are the employees). In my opinion, it's most effective to analyze GameStop separately versus their brick and mortar competitors and their e-commerce competitors. I attempted to combine personal experience, surveying customers, and perusing online reviews such as the one here to formulate analysis.
Against the brick and mortar segment, Gamestop's strengths are in customer service and efficiency. GameStop employees are typically more knowledgeable than their counterparts at Best Buy, and they're certainly more helpful than the staff at Walmart would be. This is an advantage to customers who are looking for recommendations and improves the experience. Additionally, you can get in and out of a GameStop store much more quickly than you could at a massive Walmart superstore. However, Walmart and Best Buy sometimes provide better trade-in value than GameStop does, and they can be convenient to customers who are looking to shop for other things besides video games. My takeaway in this segment is that GameStop has a fairly good market position against other brick and mortar competition, though we can perhaps expect some price competition.
Against e-commerce, GameStop has a couple of advantages. For customers that have never sold items online, it can be a pain to create an account, box up games, and ship them out. Additionally, gamers have to wait a couple days for their new game to arrive. On the other side, one big advantage of using Amazon or Ebay is that the seller could use the profit from selling their games to do anything they want, as they would recieve cash. Selling or auctioning online would also likely result in a better payoff than sellers could expect from trading in at GameStop. This is a tougher form of competition in my opinion, but I would still expect GameStop to retain a solid position based on the superior convenience to the customer.
Another important factor to consider regarding competition is how small, mom-and-pop game shops compete against GameStop. This article from Polygon was helpful in providing some background on the economics of the smaller shops.
Small shops face the same threats that GameStop faces except without the benefit of operating on scale. Without the benefit of being a large corporation, small shops are forced to spend a much higher percentage of revenue on overhead and advertising which cuts deep into their margins. Additionally, small shops often provide more value on trade-ins to bring in customers, further squeezing profits. They are somewhat forced to do this to make up for things like pre-order bonuses that larger firms can offer.
Will Gamestop Buy A Digital Download Game Free
It is sad, but if trends in the video game store business continue, the first ones to be driven out of business will be the smaller shops. At a certain point, their already thin margins will be whittled down to nothing at all and the economics of running a single video game store simply won't be feasible. If this indeed plays out, GameStop stands to take the market share of shops that drop out of the competition. Customers used to a small, physical store that focuses on games will be drawn to the most similar experience left standing: that offered by a GameStop store. I believe this factor of the market provides somewhat of a cushion to GameStop and may lessen the haste of their decline.
Digital Downloads
Digital downloads are a very real threat to GameStop's core business moving forward. The key damage that digital games do to the company is in the fact that a digital game cannot be traded in, robbing GameStop's trade-in business and keeping customers out of their stores.
There are some obvious benefits to customers when they download a game digitally. First, they don't have to go to a store or wait for a game to ship. This convenience factor is a powerful force; most people would rather avoid a trip to the store and let a game download from the comfort of their home. Also, digitally downloaded games can be played anywhere without needing a disk. This can be convenient for someone who would like to play a game in different locations (ie playing at college, at a friend's house, etc).
On the other side of the spectrum, there are a couple disadvantages to digital. To my eyes, it appears the big downside is that bargain gamers cannot resell a downloaded game when they are done. This might lower the number of games that a customer can afford to go through each year. Additionally, the digital method appears to be less friendly for people who want to play older games, whether they do so for sentimental reasons or to be cheap. For people that like to play many different games, storage can potentially be an issue as well. (This article discusses some of the downsides of going digital for games.)
My takeaway is to expect a decline moving forward for physical games, as I see the convenience factor being more powerful than anything physical games still offer. However, I do believe there will be a subsection of customers that continue to use physical games moving forward-- I doubt the business fully dies anytime in the next ten or even twenty years.
The best thing that GameStop can do is to try to design their store offerings to keep as many customers coming as possible. Whether that's through expanding collectibles (gross profit grew 21% in 2017), offering better pre-order deals, catering their products more towards retro/classic gamers, or other strategies, GameStop must try to keep traffic coming in. I do believe that they can still be a profitable company for decades to come, but it may be in a smaller, more niche type of business. Additionally, GameStop does do some digital business, with $162 million of gross profit in 2017. If digital takes over, GameStop can likely grow this somewhat moving forward.
Technology Brands
First of all, I have seen a disturbing number of investors fail to correctly interpret the $388 million write-off to tech brands. If an adjustment isn't made to analyze the write-off as a one-time, non-cash expense, it looks highly disturbing. Out of nowhere, GameStop's profit has suddenly tumbled 90% in 2017, their ROE is down to 1.6%, their P/E is 38x, their payout ratio is 447%, etc. Those numbers obviously do not reflect GameStop's earning power moving forward, but they have tricked a lot of lazy/uninformed investors.
Moving on to the business itself, I think investing in tech brands was somewhat of an error by GameStop management. Seeing that they had major threats to the core business and flush with cash, management decided to spend nearly $800 million over the course of several years to diversify the company into the wireless dealership business. This may have been a good move for management, as they got a bigger empire and perhaps greater longevity, but shareholders likely would have been better served if the cash was returned to them. Aside from firms run by Warren Buffett or other masters of allocating capital, most companies do not do well by using M&A to diversify-- GameStop's brand and expertise in video games do little to help in managing a fleet of AT&T stores.
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However, tech brands indisputably does still have some level of value. If you model out the write-off from the number presented below, the segment generated a pretax profit in 2017 of $72 million.
Will Gamestop Buy A Digital Download Game Pc
If I'm management and my stock is trading at an EV/FCF of 4x, I would see if I could divest from tech brands and use the proceeds to buy back stock on the cheap. As a very rough estimate, assuming a tax rate of 25% and discount rate of 8%, the perpetuity value of the segment based on $72 million EBIT would be $679 million. If anywhere near that amount could be raised(say $500-600 million), management could [A] buy back half the outstanding GME stock and [B] be free to focus on their core business moving forward.
Valuation
Given all of the previous analysis, my base-case narrative for the valuation was for a steady decline moving forward. I modeled in a small boost in FCF for 2018, reflecting the fact that GameStop increased inventory by $245 million in 2017 and I expect them to draw that down. After 2018, I instituted a -7% growth rate through 2022 and a -5% annual rate of change in capex, followed by a -2% terminal growth rate. My WACC was 8%.
The interesting thing about this valuation is that even with a wide range of inputs, GameStop's share price still seems highly favorable. I ran a sensitivity analysis, and the company is still significantly undervalued even with growth of -15% and a WACC of 10%.
In my view, this constitutes a substantial margin of safety. I feel quite safe that when I purchase a share of GameStop, I am getting substantially more than $13 of intrinsic business value.
Will Gamestop Buy A Digital Download Game Free
Conclusion
With 121% upside on my base-case model, I recommend GameStop as a buy for investors looking to take advantage of excessive pessimism. My personal feeling is that five years of constant under-performance has caused many investors in the company to become depressed and capitulate; who wants to tell their friends that they have been sitting on a loser for five years when they could instead switch into Amazon and pretend like they bought in a couple years ago?
The risk to investors is that GameStop declines much more quickly than I expect and that within ten years, they are out of business. Based on my analysis here, I don't see that happening, but I will not rule out the possibility. GameStop's clean balance sheet makes near-term bankruptcy risk much lower than it could be if the company had employed more leverage.
Gamestop Digital Download Xbox One
Regarding a catalyst, I am not hopeful at this point that GameStop will sell off tech brands to fund a buyback, although I think that could be a quick, value-creating move. Investors will instead have to be patient and wait for dividends and buybacks to force shares higher. How many quarters of a 12% dividend yield can GameStop issue before buyers are attracted? I expect that before many years pass, investors will recognize the financial strength that GameStop still possesses and will reward the company in the market.
Disclosure:I am/we are long GME.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.