GameStop’s 2020 results, released this week, were disappointing, with losses over $200 million last year.

These weak results may be the best GameStop is likely to do for some time. The reason is something called the “video game console cycle.”

Video game consoles are a huge part of GameStop’s business, especially with the games themselves increasingly moving to digital downloads. New consoles sell like crazy when they’re first released. Gamers line up outside stores, sometimes even overnight, eager to get their hands on the latest tech.

And then…the enthusiasm fades. Sales of the console drop, and another doesn’t come out for 4-7 years. The lines outside GameStop disappear, and business gets tougher.

There are three major video game console makers: Microsoft, Sony and Nintendo. Microsoft and Sony just released new consoles in November 2020, right in time for the Christmas rush. Nintendo’s latest console came out in 2017, and they may have a new one ready within a few months.

Where does that leave GameStop in the later months of 2021 and in the next several years? All the major companies will have recently introduced new consoles, and their sales will have started to drop off. Physical game sales are likely to continue to be supplanted by digital downloads. And whatever rent abatement they were able to get from landlords due to COVID will have likely ended.

This could lead GameStop to much bigger losses in the future. Indeed, before COVID, losses were significantly larger, coming in at $500 million and $700 million for 2019 and 2018 respectively.

If Chewy founder Ryan Cohen and the team he’s putting in place can turn GameStop into a viable e-commerce business quickly, they may escape this fate. But they have 5,000 stores with long term leases and limited cash reserves to fund this transition.

Investors may be expecting a brighter future for GameStop with Mr. Cohen’s changes and the end of COVID, but I suspect the mediocre results we saw in 2020 may be a best case scenario.

For more on GameStop, check out these posts:

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Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0

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