GameStop is perhaps the most well researched stock in history. We have seen DD’s encompass different trading strategies, market structure, banks, ETFs, etc.
I do think one area lacks, fundamental analysis. I get it, we all believe the share price will be $69m+ and don’t want to hear what the share price could be from a fundamental viewpoint. But, after the MOASS, there is still a company with great fundamentals that the share price will be valued off.
Personally, I will sell 1 share at $69m and keep the rest because I believe in what GameStop is building.
What I think we should put more effort into is the underlying fundamentals of the business. What are they doing to grow revenue? What are they doing to pivot from brick & mortar to tech? What revenue assumptions can we make? These are important questions that have significant impact on the business and share price.
You can see my previous DD here:
Refurbished Electronics TAM & Competitors
By 2022, IDC notes that the used smartphone market will reach $52.7 billion. By 2031 the refurbished mobile phone market is projected to be $143b.
Why is the market growing?
The pandemic caused people to be more budget conscious as unemployment skyrocketed.
Inflation without real wage growth. The cost of new products increases, and wages haven’t caught up, causing consumers the inability to purchase new electronics.
Sustainability (ESG investing): People have become more educated and conscious about the environmental impact’s electronics have on our world. Reusing an electronic product helps this. The metals, chemicals, and plastics associated with electronics has negative impacts on our environment.
Back Market – physical hardware and a B2C marketplace. They partner with certified refurbishment companies that resell electronics. Back Market takes a cut of the total GMV processed.
The company reportedly facilitates the sales of over 200K devices every month — about 6M users have purchased a device on the company’s platform.
It is currently supported by a team of 650 employees, and it maintains operations in 16 countries, including the US, Japan, and several European countries.
Recently raised $500m at a $5.7b valuation. Last May, Back Market raised $335m at a $3.2b valuation. Assuming the below revenue, I roughly project 2020 revenue of $1b. Their latest valuation would put their P/S multiple at 5.7x.
“In Europe, Back Market is a successful and trusted platform: Gross sales grew from $4 million in 2015 to $120 million in 2017. In 2018, after the U.S. launch, they reached $300 million, a figure the company hopes to double this year.”
Why does GameStop win?
Simple, if I wanted to sell my iPhone, I can’t just sell it to Back Market. They only sell refurbished iPhones from verified sellers on the marketplace, they are a B2C marketplace.
The biggest pain point for consumers is finding a place to drop off or send their iPhone. GameStop has 4K stores to trade-in electronics. This geographic footprint solves the biggest consumer pain point.
GameStop provides in-store credit. This incentivizes consumers to trade-in products and purchase new products. Back Market doesn’t offer this.
Above is a rough estimate of how much GameStop generates off refurbished products.
Did we know that GameStop has a massive refurbishment center near their HQ?
The ROC is a 182,000 square foot facility that opened in 2010 and is located at 2200 William D. Tate Avenue in Grapevine, Texas, just down the road from GameStop’s headquarters.
GameStop revenue assumptions
Back Market is estimated to have $1b in 2021 sales and I project they generate $1.5b in 2022 which gives them a 2.8% estimated market share in 2022.
Taking into consideration GameStop’s robust refurbishment center, meaning they can process larger volumes of refurbished electronic equipment, and their store footprint, I estimated refurbished sales to be $500m in 2022 and will grow to $1.3b by 2025. This is significantly lower than GameStop’s 2017 refurbished sales of $2.1b and a slower growth rate than Back Market, as GameStop has to focus on multiple categories not just the electronic secondary market.
Used Video Games TAM, Used Video Game NFTs & Competitors
Total US 2020 sales of physical and digital video games were $57b. I estimated the used game market to be 10% of the total market representing $5.6b. The used market is 100% made up of physical sales.
GameStop broke down used sales up until 2019. You can see from the below graph, used sales have slowly decline as video game sales moved from physical to digital.
How does GameStop stay relevant when digital video game sales outpace physical?
They have partnership agreements which stipulate a revenue share with console makers (Microsoft & Sony) on any digital downloads from consoles GameStop sells.
We all know video games are moving digital, sell now and ask questions later Anthony Chumbawamba! This guy seriously irritates me.
His job is to literally ask questions to better understand companies he evaluates. When you stop asking questions, you are the stupidest person in the room, sorry Mr. Chumbawamba.
Sorry for the personal rant but come on…. (he gets two memes hahaha)
So, GameStop shares in revenue on new digital downloads. Now what about the used market? Why has the secondary market essentially evaporated?
It’s not just because of the move from physical to digital sales. When you purchase a game from the PSN, Xbox, or the Steam store, you do not actually own the game. What you do get is a license to play the game for as long as the publisher wants you to.
Why was there secondary market for physical games? “Over a century ago, the U.S. Supreme Court first articulated the “first sale doctrine” in copyright law, under which a copyright owner’s exclusive right to control the ownership or transfer of a lawfully made copy of copyrighted content is exhausted after the owner’s first sale of that copy.”
So once Microsoft, Sony, EA, or Activision sold a copy to GameStop, their ownership ended. GameStop capitalized on this market and I assume owned a majority of the used video game market for years.
Recently, the EU ruled that the “first sale doctrine” should apply to digital video game sales, but nothing material has yet to evolve from this.
Why have Microsoft, Sony, EA, Activision fought to keep the digital secondary market from growing?
Because they have no way of authenticating and reauthorizing the sale of used digital games. NFTs solve this major pain point.
Robot Cache is the first to try and resell digital PC games. Robot Cache is a marketplace and takes a cut of GMV. https://store.robotcache.com/#!/home
Robot Cache allows for US currency and IRON (no clue what that is).
When you want to sell a game, you get 25% of the money — 5% goes to the marketplace, with the publisher then getting 70% of the resell.
Steam – Marketplace that Microsoft and other games developers sell through. However, this is just for PC not console. The likelihood they develop something that competes against GameStop is low.
Opensea and Coinbase. This comes down to two items: User experience and content.
Opensea lacks a user-friendly platform. Coinbase has a very user-friendly platform.
Opensea has some content (BAYC & Cryptopunks). Coinbase has literally no good content.
Could GameStop, using NFTs and their marketplace crack the code on reselling digital games?
My below analysis will cover some known facts and assumptions. I think the NFT marketplace is going to be bigger than we think. Forget Bored Apes and Cryptopunks, the used electronic and game market is massive, and no one has figured out a useful way to resell digital games.
First, we need to understand what an NFT actually does.
In its most basic form, an NFT represents ownership of an item. We have seen this in digital art. But what most people forget is that during every transaction in the physical world a “contract” is created authenticating ownership.
Here is an example:
When you buy clothing, what do you receive that authenticates ownership? A receipt.
When you purchase a house, what authenticates ownership? A mortgage.
So, the basic underlying functionality of a NFT isn’t a Jpeg of a rock, it is authenticating ownership. And just like in the physical world, where we receive something that authenticates a purchase, an NFT does that in the digital word.
What are the biggest pain points for large corporations adopting NFTs?
The major pain points are:
Brand IP fraud
How does GameStop’s NFT marketplace solve the above pain points?
Brand IP fraud – Simple, have an ethical mindset when regulating the sales process. Opensea has openly mentioned insider trading on their marketplace. They don’t give a shit because they collect a fee for each transaction whether its legitimate or fraudulent.
Not economical – Fact, GameStop’s gas fees will be significantly lower allowing for batch minting of 1K or 1m items.
Not scalable – Currently very few easy-to-use options exist to batch mint NFTs. Opensea doesn’t offer a batch minting feature. Assumption: GameStop’s marketplace will allow for quick and easy batch minting.
What does all this mean for GameStop’s NFT Marketplace and reselling digital video games or in-game purchases?
Example: Microsoft will now be able to mint each digital copy of Halo Infinite it sells. Using NFTs, Microsoft can authenticate who the original purchaser was and authorize the reselling process to the new owner, all the while taking a cut of the transaction.
When the original purchasers are done with the digital game, they will list if for sale on GameStop’s marketplace, let’s say for $20 dollars. Below is an estimate take rate on the marketplace.
So, now assume Microsoft sold the original game for $60, they just made an additional $10 off that one game for a total of $70.
In-Game Example: Fortnite is free to play and generates 100% of revenue through in game purchases. Fortnite generated $5b in 2018 and $5.1b in 2020 from in game purchases.
Now think, what if each item sold within Fortnite was a NFT and could be sold through the GameStop’s marketplace and Fortnite could get 50% of the resell?
If a limited edition Fortnite skin cost $1K new. This could be resold through GameStop’s marketplace at $5K because of scarcity/demand, and if Fortnite gets a 50% fee on the resale, they would generate $2500, 2.5x what they originally sold if for. So now one item instead of making Fortnite $1K has made them $3.5K.
Thesis: GameStop’s marketplace could act as a facilitator for major brands to mint bulk quantities of items to sell digitally and in the metaverse. GameStop’s marketplace could create an avenue for the secondary market to reappear in video games and in-game purchases. GameStop’s marketplace won’t just be for Jpegs of rocks, it could help brands mint NFTs in video games, digital clothing, land in Sandbox and Decentraland, tickets to Snoop Dog’s concert in the metaverse, the marketplace will help literally every category by providing the necessary infrastructure to utilize NFTs for their true purpose, authenticating ownership.