A discussion of $GME’s fundamentals from a TECHNICAL rather than FINANCIAL perspective, as explained via burritos

I’d like to make a thesis statement here: treating Gamestop as a failing brick-and-mortar retailer being left behind by an ever-increasing move to non-physical distribution is an example of an inability for traditional finance to perform due diligence on an industry they do not understand, and it’s going to cost them.

To kick things off, I now own 3 GME, average unit cost around $300. I’m probably not going to buy more, and I doubt I’ll make money off the investment, at least not any time soon; I’m a cautious investor, the kind that likes middling dividend yields. Rocketships and using the Mohs hardness scale to describe your hands confuses me.

But I purchased 1 GME for the same reason a lot of people did, I found the idea that the incredibly wealthy are able to ruin a functioning but struggling business by betting on its death as a fait accompli disgusting. When I bought I mentioned it to my girlfriend, and she suggested that this might result in the recovery of Gamestop as a brand, that they could possibly revive and be a helpful part of a growing video game ecosystem. My initial knee-jerk response was “nah”.

After putting more thought into it, I’ve decided she was right and I was wrong.

Let’s talk about the elephant in the room here — video gaming’s seemingly inexorable move away from needing physical purchases and toward digital distribution. This has been true for a decade, so it must continue to be true, right? Gamers like buying games online, they hate driving to the mall for physical copies, it’s a fact of life.

This is something you’d assume if you have no idea how or why distribution has moved online, and shorting the only game-oriented retailer in the US then makes perfect sense, because you’re under the impression that buying games physically will be dead. Not just Gamestop, the concept itself.

Here’s where their fundamental analysis is built off a profound ignorance, they know what has happened, but have no idea why. They’re incapable of root cause analysis here, because they don’t really get that excited about video games, they just pick up the latest Madden or something (I don’t know what games hedge fund managers play but they’re probably bland). They go on TV and discuss the mechanics of video game sales as if we’re just buying burritos, and everybody seems to like those digital burritos now so digital burritos it is. Gamestop sold the wrong kind of burrito, ergo they’ll be bankrupt.

Fortunately, other investors can do this analysis, and have. It’s been briefly touched on by the folks at /r/wallstreetbets, but only superficially, and we can put it in more detail.

First off, the move to digital distribution has always been predicated on an assumption that there are forces at play restricting the total volume of information that needs to be delivered for the sale of a AAA game, which help to keep it in-line with what can be pushed to the customer online. Without these restrictors, AAA games will grow in size faster than broadband pipes. This is true of other technical fields as well, and it’s why AWS still uses big ol’ trucks to deliver your backup recovery if it’s warranted.

These factors are, in descending order of criticality: delivery media capacity, developer art asset pipeline, and finally end user hardware bandwidth. Let’s address them one by one, both in the context of the last decade (where they worked to bolster digital delivery), and in the next (where I predict they will do the opposite).

First, we have the obvious — media capacity. This is likely the only one traditional finance has even a cursory understanding of, and for the last 40 years of video games it was the strongest force involved. Drawing a chart of delivery media capacity versus average broadband speed would show two clear previous eras, one where it was faster to snail-mail software to the consumer (roughly up to the mid-2000s), and 2010 to now, where I can pull down a Blu-ray’s worth of content in less time than it would take to drive to the store. I, as a burrito-eating customer, base my decision-making process here on how much of my own time I have to spend buying a game, and the balance points me toward digital distribution…

…and we’ve entered a brave new world as of last year, where the latest Call of Duty: Modern Warfare is being delivered via an SSD and is larger than I could feasibly download in a day. This essentially means that I don’t get the same burrito I purchased digitally that I was getting physically, a distinction that doesn’t matter to a non-gamer but very much matters to the customer base of a corporation like Gamestop. Restrictor #1 no longer applies for the biggest, most valuable AAA burritos.

Having taken away the strongest limiter on game size, we move to the next, and it’s something that both finance and the average gamer probably never thinks about. Games can be best described as an amalgam of various art assets connected by code, like a burrito is an amalgam of fillings connected by tortilla, and when it comes to the size of the art assets involved (primarily meshes, textures, etc) the cost of producing these assets/fillings was generally tied loosely to their size.

Big studios spend a large amount of their budget not just on making 3d models (raw steak or chicken), but paying technical artists to process them through the game dev pipeline (grilling or braising), with the primary goal being to make them game-ready. This process has the side effect of making AAA game assets cheaper to produce when they’re smaller — tech artists spend less time baking lighting (marinating), hand-crafting LODs (cutting into bite-sized pieces), perfecting large textures (I dunno, adding sour cream?), they don’t have to sweat the details as much. If large game developers could skip all the art asset reduction steps and just let the engine figure it all out, it would save them a lot of cash…

…and Unreal Engine 5, announced late last year and likely the baseline for a massive amount of new games, offers exactly that in Nanite (virtualized micropolygon geometry) and Lumen (a fully dynamic global illumination solution). Proprietary to Epic now, but the other engines will likely follow. Tech artists can produce ridiculously large assets, drop them in without spending any other time on the traditional pipeline, and get perfect game-ready results while saving the developer massive costs. They dump the ingredients into a burrito-filling robot and out pops burrito-filling. All they have to do is, uh, let the size of the delivered game balloon a lot. Huh, I’m seeing a pattern here.

But wait, you say — what about the console hardware? Surely you can’t just stuff more and more gigabytes of content into a game and have it still run on consumer hardware, there must be bottlenecks that you’ll hit like memory bandwidth on the video subsystem, or storage bandwidth, or… what’s that?

Microsoft and Sony both prioritized exactly these things in their latest generation consoles specifically because they were bottlenecking performance due to ever-increasing game sizes? Almost like they’re not expecting digital distribution to fully replace physical distribution any time soon, and they’ve bet billions of dollars on it. No burrito analogy for this one, sorry.

I could go on and on about other facets that are relevant here (I didn’t even get to VR! Steam libraries full of unplayed digital-only games! Massive hardware shortages of PS5/Xbox Series X/RTX3080! The use of game-tangential physical objects to reflect your participation in a culture!), but I think I’ve made my point — traditional finance knows as little about how the video game industry works as I do about SEC filings, but they bet a ton of money on it anyway.

Their bet was that Gamestop would go bankrupt because they think it sells oddly-shaped burritos, and they don’t really eat burritos so they’re not sure why someone would want to buy one anyway, so they are sure that physical burrito-eating will go out of style. They don’t even know what kinds of fillings go in a burrito, is it ice cream? Toothpaste? Can you get them in different trims? What are all the little multi-colored sauces in the self-serve refrigerated section? Going into a Gamestop, for someone shorting it to death, is like going to a taqueria and asking these questions and betting it will die because you thought the answers were wrong.