Key Points
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Sony announced this week that it will no longer put out video games on discs for new PlayStation releases starting in 2028.
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GameStop’s model once relied primarily on the sale — and, more importantly, the resale — of video games.
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GameStop is trading at a reasonable earnings multiple, and it has enough cash to keep shopping for change after being rebuffed by eBay.
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There are plenty of things weighing on GameStop (NYSE: GME) these days. Annual revenue is now 61% lower than when it peaked 14 fiscal years ago, and that’s without accounting for inflation. Despite its meme-stock appeal, the small-box retailer of video games and collectibles has seen its sales contract in each of the past four fiscal years.
It tried to shake things up with an unsolicited buyout offer for eBay (NASDAQ: EBAY) two months ago, but GameStop has been outbid by reality. This week, the chain got another worrying sign: Sony (NYSE: SONY) announced on Monday that it will cease physical game disc production for new games releasing on PlayStation consoles starting in 2028.
Spin doctors
Time hasn’t been on GameStop’s side for years, but now there’s a date for the potential end. We’re now 18 months away from when one of the three leading console makers goes solely digital in distributing new titles. Sure, you can buy access to digital codes through brick-and-mortar retailers. It’s just become less necessary to do so in person. Console makers and software developers are cutting out the middleman.
The digital migration isn’t new, and some consoles have been available without an optical disc drive since 2019. However, PlayStation gamers won’t have the option to switch to spinning discs for new releases come 2028. This is bad for GameStop not just for the potential slide in store traffic as digital delivery becomes the industry standard. GameStop used to carve out a high-margin living selling refurbished discs and cartridges of popular games. Now it’s leaning on collectibles to offset the slide in its resale business. That approach is working — for now — but collectibles don’t offer the scalability and differentiated advantages that made GameStop’s moat so effective a generation ago.
No more going in circles?
The news isn’t all bad for GameStop. Profitability is growing despite four fiscal years of declining sales. Despite all the meme-stock hype, the video game stock is trading at a reasonable 21 times forward earnings. However, the surprising 14% jump in net sales was fueled entirely by a spike in interest for the store’s trading cards, apparel, toys, and pop-culture merchandise. Back out the collectibles business, and net sales declined 7%. The business model isn’t as sustainable as its former flywheel, but there are worse places to be in the retail space.
GameStop also has a cash-rich balance sheet. It wasn’t enough to land eBay — even if GameStop isn’t throwing in the towel on the platform deal just yet — but it will probably have to aim smaller if it eventually tries to grab something else. A company isn’t going to take a stock-and-cash deal from a business whose shares have declined 4% over the past year and plummeted 56% over the past five years.
Sony’s move is evolutionary, not revolutionary. Will other console makers follow, in today’s climate of rising memory and data storage costs? GameStop isn’t in the clear, but it has resources, if not cheat codes, to keep playing the game.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends eBay. The Motley Fool has a disclosure policy.
