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Better buy: Amazon vs. GameStop

Plenty of consumers love video games, but they don’t love how they’ve traditionally been bought.
The post Better buy: Amazon vs. GameStop appeared first on The Motley Fool Australia. –

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

two people going in different directions trying to decide which asx share to buy

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

GameStop Corp (NYSE: GME) is fighting the good fight and cheering its prospects, even in the face of incredible adversity. The struggling video gaming retailer reported disappointing revenue and a net loss for the recently-ended third quarter of fiscal 2020. However, management touted a 16.5% year-over-year increase in same-store sales in November. Launches of new PlayStation and Xbox game consoles are driving gamers into a buying frenzy. GameStop CEO George Sherman says that will be a big growth driver throughout the fourth quarter.

When all is said and done, though, Amazon.com Inc (NASDAQ: AMZN) is still Amazon, and GameStop is still GameStop. The former remains unstoppable, and the latter remains reliant on a dying sliver of the video gaming industry. As such, Amazon is the default winner of any “Which is the better buy?” contest.

Game over for GameStop

GameStop’s sales fell 30% to just over $1 billion last quarter, while same-store sales slumped more than 24%. The company booked an adjusted operating loss of $83 million.

Admittedly, GameStop deserves something of a pass on these weak results because of the pandemic. Consumers are still mostly steering clear of stores. However, market research outfit NPD Group noted last month that U.S. consumers increased the time and money they spent on video gaming by strong double digits in the second and third quarters of this year. It just wasn’t being spent at GameStop stores. Gamers have shifted a lot of spending to digital purchases instead.

GameStop’s biggest problem will still be around once the mania surrounding the new PlayStation and Xbox consoles fades. That is, physical game disks and game cartridges are a dying breed.

To put things in perspective, digital revenue made up nearly 63% of last year’s video gaming revenue, according to S&P Global Inc. At one point, that figure was 0%.

This shift is evident in GameStop’s results. Sales and profitability have been falling for years, and the company hasn’t turned a full-year adjusted profit since 2018. This downtrend clearly pre-dates COVID-19. As digital downloads became a mainstream means of buying games, GameStop’s financial performance deteriorated accordingly.

The trend towards digital downloads will continue. The new generation of PlayStation and Xbox consoles includes all-digital versions that don’t even allow for a disc.

This doesn’t necessarily mean GameStop is completely dead in the water. It reached a deal with Xbox-maker Microsoft Corporation that provides GameStop with a portion of digital revenue produced by Xbox consoles it sells. It also sells toys and collectibles in addition to video games.

There’s not a much-needed game-changer for the company anywhere in sight, though. Collectibles accounted for 11.4% of last year’s sales, while game software made up more than 46% of its revenue.

Unstoppable Amazon

By contrast, Amazon has been extremely successful both before and during the pandemic. In 2019, its top line grew 20% year over year, driving a 17% improvement in operating income. Growth has accelerated in 2020. Year to date, sales are up 37%, driving a 68% surge in earnings per share. The company has invested in capacity to meet the swell of demand for online shopping, which will help Amazon maintain its e-commerce dominance even after COVID-19 is in the rearview mirror.

Less obviously, but perhaps more importantly, the company is bringing more consumers (and their personal data) into the fold. Consumer Intelligence Research Partners estimates another 14 million U.S. households have become Amazon Prime subscribers just since the end of 2019. Historically, Prime members spend more than non-Prime shoppers. They’re also an expanding audience to drive more advertising sales. Amazon’s “other” revenue — believed to be mostly ad revenue — reached $5.4 billion last quarter, up 49% year over year (excluding currency fluctuations).

It doesn’t take a lot of reading between the lines to understand just how different these two companies are. Both are being affected by major trends in the consumer arena. However, Amazon is benefitting from those trends, while GameStop is a victim of changes within the video gaming market. That makes Amazon the no-brainer buy.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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James Brumley has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends GameStop and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Better buy: Amazon vs. GameStop appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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