GameStop doubles down on web3 and doubles losses in Q1

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During its Q1 earnings call on Wednesday, GameStop (GME) reported a net loss increase of 100% compared to last year’s Q1 ($66.8 million in losses then, $157.9 million now). Meanwhile, chief exec Matt Furlong reiterated the company’s commitment to its cryptocurrency, web3, and NFT-based growth strategy — amid a precipitous decline in NFT and crypto markets.

Challenges previously faced by the world’s largest video game retailer (foot traffic trends, supply chain issues, etc.) have been joined by an existential threat: the ever-accelerating pace of digital downloads eclipsing physical game units.

The company’s leadership has been forced to pivot, trying to leverage its momentary meme-fame and declaring themselves “a technology-led organization.” Central to proving their turnaround strategy, says Furlong, is “the launch of new tech products, such as our digital asset wallet and the upcoming NFT marketplace.”

In Q1, GameStop’s net sales increased by 8% compared to last year’s same quarter ($1.3 billion in sales then, $1.4 billion now).
Furlong stated in the earnings call “long-term revenue growth is a primary metric by which we believe stockholders should assess our execution” – despite the 100% increase in net loss this quarter.
Capital expenditures (CapEx) were down $3.9 million compared to last year’s Q1, standing at $10.8 million this quarter.

The Texas-based company curiously denied a Q&A session after Furlong’s brief statement — shareholders were hoping for strategic clarity on its digital transformation. Yet, a review of GameStop’s spending on web3 might yield clues to future success.

What happened to the money investors gave GameStop?

As reported in the Wall Street Journal, GameStop has assembled a new unit focused on NFT product development, hiring at least 20 staff to run it. The company has announced two major crypto company joint projects:

A non-custodial, general use wallet created through a partnership with Loopring, a Chinese headquartered Ethereum L2 scaling project that utilizes ZK-Rollups for speed and cost-efficiency.
An NFT marketplace created jointly with Immutable X, an Ethereum based L2 platform advertised as offering “carbon-neutral” (a claim that has not been proven as of yet) trading and minting and zero-cost P2P transactions.
In addition to its own products and services, GameStop expects partnerships with “a dozen or so” more crypto companies – anticipating millions of dollars of resultant CapEx. None are named.

As stated in a recent 8-K form, GameStop and its partners will be making “reasonable and good faith efforts” (notably not ‘best efforts’) to refer game studios to deploy their NFT projects on Immutable X via the GameStop NFT marketplace.

Ultimately, this amounts to:

A proprietary ETH-based wallet.
A soon-to-launch greenwashed NFT marketplace with speculative buy-in from games publishers and IP owners.
A plan to spend more money on… things?

The primary value drivers of this speculative gaming NFT empire require participation from the exact publishers that GameStop has been siphoning revenue from while building its global used game resale juggernaut. This is going to require delicate negotiations that could end with GameStop’s current revenue being hit in order to get publishers on board.

Given that many big publishers are themselves banking on NFTs by building their own tech platforms (and enduring massive fan pushback,) it’s hard to see this path being an easy one for GameStop to walk down.

It’s not clear how GameStop’s reliance on its digital strategy is fully supported by its current endeavors, especially in light of the substantial and ongoing spending required.

When you throw in the fact that the NFT market has all but imploded in the past few months and the drumbeat of regulation is growing ever closer – doubling down on web3 seems like it has just as much potential to spell “familiar disaster” as it does “transformative success.”

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