Ryan Cohen, chairman of GameStop (NYSE:GME), once said he wanted the video game retailer to become the “Amazon of gaming.” The physical-store business model was becoming outdated in the era of digital online gameplay and downloadable games.
While that offers a broad sense that GameStop will likely be carrying a large assortment of games, equipment, and accessories that consumers can purchase online, just as they would at Amazon (NASDAQ: AMZN), the retailer’s latest moves suggest it has much more in mind.
The real target GameStop could be flying over is Best Buy (NYSE: BBY).
A lot of space to fill up
In May, GameStop announced it was expanding its North American fulfillment network by leasing a 700,000-square-foot fulfillment center in York, Pennsylvania. It anticipates that the center, which will become operational in the fourth quarter of this year, will enable it to expedite shipping along the East Coast for its e-commerce ambitions while letting it build out its product catalog.
It announced another fulfillment center lease this month, this time for 530,000 square feet in Reno, Nevada, meant to meet the same needs as the York location, but this time for the West Coast. It is effectively doubling its existing U.S. distribution space.
Can we all agree that over 2.4 million square feet of warehouse space is a heckuva lot more than GameStop needs if it is just stocking up on video game titles, gaming consoles, and gaming headsets? Besides, it’s the “product catalog expansion” that is really key to where GameStop is heading.
A massive opportunity
In the video game company’s 2021 proxy statement, GameStop noted its expansion would be “across gaming, collectibles and other natural adjacencies. We believe expanding our addressable market size over time will help reduce our reliance on the cyclicality of the console-based gaming market.”
So we know right there that GameStop doesn’t want this fulfillment space for its legacy business, but rather is looking toward those “natural adjacencies” for growth, which is why Best Buy is in the crosshairs.
Consumer electronics is exactly the sort of natural extension of GameStop’s business that would meet that criteria, and it’s made a move in that direction already.
Last December it entered into an exclusive partnership with TV maker Vizio to start selling 25 different models of smart TVs and soundbars in GameStop stores and online. It also began selling computers, monitors, game tables, and mobile gaming devices and equipment, a move it said expanded its addressable market fivefold. Consumer electronics represented approximately one-third of Best Buy’s $15.4 billion in annual revenue last year.
While the video game retailer has so far been cagey about its true plans, this seems like the most likely path, as it would necessitate the vast buildout of its fulfillment network.
It would make GameStop a one-stop gaming destination where gamers could buy all the equipment, gadgetry, and games they needed. And if the retailer integrated it with its PowerUp member loyalty program, there would be little need for gamers to visit Best Buy.
Wait for the sales
Investors should still hit the pause button. If this is the avenue GameStop is pursuing, it’s an exciting one with a lot of potential, but it also carries a lot of risk. At the level its stock trades at, GameStop is already priced for perfection.
Best Buy trades at 13 times earnings, a fraction of its sales, and 9 times the free cash flow it produces; GameStop, meanwhile, is still producing losses, goes for more than twice its sales, and trades at an exorbitant 149 times free cash flow.
That’s a lot of premium to grow into on an untested plan, meaning GameStop investors would be better off sitting on the sidelines cheering for the video game specialist and waiting for its stock to offer up a sizable discount before saying “Game on!”
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/07/27/forget-amazon-is-gamestop-really-angling-to-take-o/