GameStop’s NFT experiment isn’t going well

by James · August 21, 2022

In the following days GameStop (GME -3.80%) launched its long-hyped NFT marketplace last month, many media reported that it got off to a surprisingly strong start. Trading volume reached nearly $2 million on the first day, and the top 50 collections generated over $7.5 million in transactions in the first week. These figures far exceeded the accumulated transaction volumes of Coin baseits NFT platform, which was launched several months earlier.

However, GameStop has been unable to sustain this initial wave of interest. Transaction volumes have plummeted over the past month, confirming that a pivot to NFTs is unlikely to save GameStop.

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A sharp decline in activity

GameStop’s NFT marketplace provides a real-time look at transaction volume on the statistics page. The figures point to a large drop in activity as the novelty of the platform has worn off.

Over the past 30 days (as of Friday afternoon), the top 50 creators on GameStop’s NFT marketplace had racked up cumulative transaction volumes of just over $10 million. (Creators outside the top 50 have a very small impact on the total numbers.)

Image source: Getty Images.

While surpassing $10 million in monthly transaction volume is a respectable result for a platform just getting started, GameStop’s cut is only 2.25%. That equates to roughly $250,000 in revenue, or $3 million on an annual basis. It is not enough to be profitable.

The biggest problem is that transaction volumes have slowed to barely more than $1 million across the top 50 creators in the past week – less than $5 million per month. GameStop needs the NFT market to build towards profitability; instead, it slips further from that goal.

Time is not on GameStop’s side

To be fair, GameStop plans to add more features and creators to its NFT platform over time, including Web3 games. It can help increase transaction volume.

But even if GameStop were to increase transaction volumes tenfold compared to current levels (to about $50 million per month), the NFT market would still generate only $13.5 million in annual revenue. That maybe be enough to cover fixed costs, but it certainly wouldn’t make NFTs a significant profit engine for GameStop.

In fact, GameStop posted a pretax loss of $395 million last year, and all signs point to an even bigger loss this year. To highlight a few warning signs, GameStop’s losses more than doubled year-over-year in the first quarter, gaming spending has plunged in recent months, and GameStop fired its chief financial officer in July.

Meanwhile, the company burned through nearly $800 million in the 12 months ended in April, quickly eroding its cash pile. If the NFT marketplace is going to save GameStop, it needs to scale up extremely quickly to monthly transaction volumes in the $1 billion range (if not higher).

GameStop Free Cash Flow, data from YCharts.

Another distraction

In short, GameStop’s core business is imploding. For now, the NFT market is only exacerbating the company’s losses and cash burn.

GameStop may be able to fund its cash burn by issuing even more stock, as demand from meme stock investors has kept its valuation at absurdly high levels relative to its fundamental outlook. But to be self-funding before it burns through its last billion dollars, GameStop would need the NFT marketplace to become a major cash cow within a year or two. With transaction volumes dropping after the initial interest, that doesn’t seem likely at all.