How Will A Complete Shift To Digital New Video Game Software Impact GameStop’s Earnings?

GameStop Inc (NYSE:GME) has been facing a decline in sales of late, given the rise of digital downloads. In fact, the company might soon be sold, as some of the private equity companies are willing to buy GameStop, according to a media report. The growth in digital downloads has impacted the company’s business model of physical sales. In this note we discuss the impact on GameStop’s earnings, if all of new video game software sales were to be digital. We have created an interactive dashboard analysis ~ What Will Be The Impact of All New Video Game Software Sales Going Digital On GameStop’s Earnings. You can adjust several drivers to see the impact on the company’s earnings.

We assume the physical sales to be 60% of GameStop’s overall new video game software sales, which translates into $1.4 billion in physical sales. Note that the company also sells digital downloadable content (DLC) mostly on the day of launch. We analyze a scenario if there is a shift for these physical sales to digital downloads directly from the game publishers, thereby eliminating GameStop as an intermediary. The complete shift to digital is very much a possibility. In fact, some of the analysts have predicted this to happen as early as 2022. To understand the impact of this scenario on earnings, we use the company’s overall adjusted net income margin of 6% and 98 million share count to arrive at $0.86 earnings per share that can be attributed to physical sales of new video game software. This is roughly 30% of the company’s overall estimated earnings of $2.96 per share for 2019, according to our estimates. Note that GameStop also sells physical pre-owned video game software, which is not accounted for in this calculation.

We forecast new video game software sales to decline in mid-high single digits in fiscal 2018, and in low single digits in fiscal 2019. The decline in revenues, and the company’s charge related to impairment have impacted the bottom line in the recent quarters. The company also decided to sell its Spring Mobile business in 2018, and reduce its debt, along with focusing on the core video game business. Separately, there have been changes in the company’s top management in the recent past. Longtime CEO Paul Raines died in March 2018. He was replaced by Michael Mauler, who left after just three months, and currently Shane Kim is GameStop’s current CEO. The company’s stock price has declined more than 35% in 2018, owing to these factors. However, the share price jumped up over 20% over the last week or so, given the news of interested buyers for GameStop.