GameStop’s Crypto Dreams Are a Long Shot. What Are NFTs Even Worth?
GameStop
expects to launch a marketplace for non-fungible tokens, or NFTs, by the end of July, pushing into the digital asset space as investors hope for a wider turnaround at the embattled video game retailer.
The move into NFTs would be a significant departure from GameStop’s (ticker: GME) core retail business. It’s also a gamble that may not move the revenue needle much, and adds another element of uncertainty around the highly volatile stock.
One of the original meme stocks, GameStop continues to defy traditional analysis or trading. The shares surged more than 40% in the past few days and were ahead 12% Wednesday, thanks in part to a burst of buying by chairman Ryan Cohen. Over the past 52 weeks, the stock has ranged from $78 to $345, recently trading around $138.
The crux of GameStop’s NFT initiative is a partnership with blockchain group Immutable X, a startup. The companies plan to back NFT developers with grants through a proprietary token called IMX, doling out up to $100 million, according to a press release. GameStop could eventually receive $150 million worth of IMX tokens if its NFT marketplace and sales hit certain metrics.
Accelerating the push into NFTs is Cohen, an entrepreneur who has been trying to reposition GameStop into more of a tech company. So far, that hasn’t led to profits. GameStop recently notched a surprise $148 million net loss in its last fiscal quarter, ending in January 2022.
GameStop did not respond to a request for comment from Barron’s. However, the company has outlined plans to become more of an online marketplace for video games and related products, aiming to transform into a kind of
Amazon.com
(AMZN) for gaming.
NFTs, theoretically, fit into that vision. And Wall Street sees a large total addressable market. Jefferies analyst Stephanie Wissink expects the NFT market to reach $35 billion in sales this year and $80 billion by 2025. GameStop’s partnership with Immutable X is “a start to giving the investment community more clarity into what [the company] hopes to become,” she wrote in a recent note.
Yet attaching numbers to GameStop’s NFT initiative is a bit of a guessing game. And GameStop wouldn’t have the market to itself—other companies are building NFT marketplaces, notably
Coinbase Global
(COIN).
What is it all worth? The largest NFT platform, Opensea, does about $3 billion in monthly NFT volume and charges a 2.5% fee on sales. That implies monthly transaction revenue of $75 million or $900 million annualized.
If Coinbase were to capture half the Opensea volume with the same fee structure, it would yield $450 million in annual revenue, estimates Needham analyst John Todaro. In a bull case scenario, with volume exceeding OpenSea levels at a 3% fee, Coinbase could hit $1.3 billion in annualized revenue.
Even if GameStop captured 20% of an $80 billion market in 2025, it would only amount to $16 billion in sales volume; at a 3% transaction fee per NFT, that would generate $480 million in revenue. And that’s assuming it could fend off Coinbase and others also muscling in.
“They might beat Coinbase to the launch of an NFT platform, but I’d be skeptical of GameStop’s offering,” said Todaro in an interview. “Coinbase has a captive crypto audience that overlaps with NFTs, and Coinbase should have a leg up because they have liquidity, sourcing, and a launch partner—their whole ecosystem should be much more robust than GameStop’s.”
One hurdle for GameStop is reaching crypto buyers beyond gaming—expected to be the core of its NFT marketplace. The most valuable NFTs on OpenSea aren’t video game assets. They’re Bored Apes, CryptoPunks, and other NFTs that have become cultural icons through savvy marketing and club-like benefits for owners.
Another challenge for GameStop is that it primarily sells console games for platforms like Xbox and PlayStation, rather than PC-based games that are more decentralized and viable for NFTs. Console game ecosystems are like “walled gardens” that are heavily controlled by Microsoft (MSFT), Sony (SONY), and Nintendo (7974.Japan).
For GameStop to make inroads into NFTs, the company may have to make deals with Microsoft and/or other game studios and console makers.
And GameStop may be spending heavily on NFTs when it doesn’t have much cash to spare. GameStop reported $1.3 billion in cash and equivalents at the end of January, following an operating loss in its last quarter.
“That’s just scary,” said Wedbush analyst Michael Pachter, who has a Sell rating on GameStop. “It was not because demand was so bad, it was because they’re overspending on this NFT thing.”
GameStop has “zero probability of succeeding with this,” Pachter said, referring to NFTs. “I admire their gumption, I admire the effort they’re making to transform the company, and I actually think, directionally, this is a great place to be. I just don’t see how they have any competitive advantage.”
For now, Wall Street doesn’t appear to view NFTs as a game changer for GameStop. While only a few analysts covering the stock, the mean estimate is for revenues of $6 billion this year, flat with 2021. The company is expected to report a loss of $4.18 a share in 2022 and $3.10 in 2023.
— Daren Fonda contributed reporting to this story.
Write to Jack Denton at jack.denton@dowjones.com