GameStop

GameStop (GME) - Sell and Don’t Buy the Dip

Over the past week, we have been flooded with questions about our views on GameStop and their position in the gaming industry. Here are our thoughts:

High level: this is a war between retail investors and hedge funds (this has nothing to do with GME or the gaming industry). There's a deeper anti-establishment fight going on here. This war just happens to be playing itself out in the battlefield of GME (and BB, AMC). It could have easily been any other stock with a high short interest.

GameStop (GME): this business is quickly becoming the next Blockbuster or Radio Shack. These recent market events have nothing to do with any true fundamentals in the business. They have over 5k retail locations worldwide to service a gaming industry that is entirely digital now. Best Buy ate their lunch on the console hardware side and that ship has sailed. Also, their online business is too little too late. This stock jump is not reflective of GME having a bright future (if anything, it's the opposite).

Comparison: Best Buy has 10x the revenue of GME, 2x the e-commerce metrics (mainly online now), is diversified outside of just gaming, yet has a lower market cap.

Retail trading: in the past 12 months, retail trading went from 10% of daily market trading volume in 2019 to ~25% (Business Insider), according to Citadel (oh the irony). That's a big shift. During Covid, consumers sought new forms of entertainment and treated stock picking almost like wagering on a sports game. We think this trend is here to stay as consumers can make more consistent returns in the stock market than they can in gambling (structurally bent against them).

Platforms: speaking of platforms that are bent against consumers, Robinhood raised $1B this morning from existing investors and borrowed hundreds of millions from banks to support the “additional trading volume”. We are not a fan of Robinhood halting trading on these stocks in favor of defending hedge funds. These restrictions on retail trading is an additional argument for decentralized platforms and currencies, which are gaining adoption and momentum right now. In video gaming, these platforms and technologies are already being implemented and recent events around GME and Robinhood will likely give a shot of adrenaline to these projects and companies in video gaming. We look forward to funding some of them.

Summary / Prediction: GME is the battlefield for a broader war (retail vs HF), the company is quickly becoming the next Blockbuster and it has no place in the future of video gaming. They only own 1.1M square feet of real estate, estimated to be worth ~$85-100M (Seeking Alpha). They will likely sell all of their 5k retail locations to a real estate group to be repurposed as they quickly try to build an e-commerce business that is 10 years too late.  

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Sony’s Financial Services Business

Sony is a leader in electronics, music, and console gaming (PlayStation), yet a widely unknown area of Sony is their financial services division. This business consists of life insurance, non-life insurance, and banking. Today, the financial services division (according to the most recent earnings report - Q2 FY2020) accounted for 17.7% of revenue and 13.75% of operating income.

Sony’s financial services business has a long history and at one point was their largest portion of operating income (Source). This division is primarily located in Japan, China, Philippines, and Australia. While competing with Microsoft in the gaming space, a large provider of high margin software products, Sony has created considerable amounts of cash flow through financial services. Sony has always been known for being a leader in consumer products, and it seems like the success of their financial services business has helped them grow their business in digital/online sales (primarily via PlayStation).  

Sony's financials broken out by business line:

Takeaway: in gaming, console hardware is widely known as a low margin (or unprofitable) business that is used to get users into a specific ecosystem where they can up-sell higher margin products like subscriptions and digital game sales. It looks like Sony used much of the operating income from their financial services business to support their lack of digital/software sales until it caught up on the gaming side (it worked).