Better buy: Amazon vs. GameStop

Let's pit this year's hottest retail stock against the world's most successful online retailer. It's time to play.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

As great as an investment Amazon (NASDAQ: AMZN) has been for long-term growth investors it's no match lately against the meteoric stock rise of GameStop (NYSE: GME). The video game retailer saw its stock more than triple last year, and this year it catapulted as a "meme stock." Even after retreating sharply since their frenzied peak the shares are up 741% this young year. 

If we draw the starting line at the end of February last year GameStop is a stunning 45-bagger. That's a jaw-dropping spurt in a little more than 13 months. Amazon's been a perpetual market beater but you would have to go back 12 years to find the point where the world's leading online retailer is also a 45-bagger. 

GameStop is the hot stock, but the fundamentals are overwhelmingly in Amazon's favor. Let's size up each name to see which one is the better buy right now.

GameStop comes to play

Step aside from the hype, and GameStop investors are caught between a stock and a hard place. The company has posted 12 consecutive quarters of year-over-year declines in revenue, even in its latest financial report where low-margin PS5 sales weren't enough to will the retailer to positive sales growth. 

The empire is shrinking its physical footprint, closing 12% of its stores over the past year. This isn't necessarily a bad thing, especially with the surge in e-commerce giving investors hope that the nostalgic brand can be repositioned in a digital future. GameStop will have to keep cutting costs if it wants to compete more effectively with Amazon and other online specialists, especially with its highest margin business -- the resale of physical video games -- fading in the online revolution. 

Net sales have been nearly cut in half over the past five years, down 46% from where they were five fiscal years ago. A few years ago GameStop was a money machine, but it has posted three consecutive years of steep losses. GameStop doesn't seem to look the part of a stock hitting all-time highs this year, and with short interest dropping substantially is there life for GameStop beyond the meme squeeze? 

The key to GameStop justifying its 45-fold spike since the end of February last year is its ability to transform. It will die if it stands still. There's fresh blood flooding the boardroom and its executive ranks. Will that be enough? It's playing from behind at this point.

Amazon makes it rain

In the same five years that GameStop's business has been roughly cut in half we've seen Amazon revenue more than triple. Momentum is naturally on Amazon's side here, accelerating with the 44% year-over-year top-line spike in its record-breaking holiday quarter. 

There is a lot Amazon excels in, but it's also everywhere GameStop wants to be. It's been selling video games and related gear online for more than two dozen years. Amazon's Twitch is the gold standard for diehard gamers looking to share their in-game streams, a market that GameStop would love to own. Digital distribution is largely in the hands of console makers and software publishers, but if GameStop sees an opportunity in joining the crowded realm of cloud-based gaming services it will have Amazon's recently unveiled Luna to reckon with now.

Facing the end boss

Everywhere GameStop turns for growth it seems as if Amazon is already there. This isn't the real problem for the hot-but-damaged retail stock. GameStop's enterprise value of $11.6 billion is less than 1% of Amazon's $1.7 trillion.

The problem for GameStop is that a lot is expected with the stock at new highs but its fundamentals are at new lows. GameStop has tried to make a dent in digital, even years ago when it actually had the cash flow to deploy next-gen growth initiatives. It didn't work then. There's a lot of brand awareness now as a meme stock, but the clock is ticking on its ability to turn its influencer cred into a bankable business. Amazon is the best buy at this point. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Rick Munarriz has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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