A year and a half ago GameStop (GME) was one of the largest equity holdings in my portfolio. For those who are not familiar with the company, GameStop is the largest video game retailer in the US. I had held shares of GameStop for over 4 years and was excited by the company’s growth potential. The stock consistently rose over the years and even split once. GameStop even gained market share by buying out rival Electronics Boutique a few years ago.

So if things were so great, why did I sell it? I started thinking about some of the factors that Warren Buffett looks for in an investment like economic moats, high ROE, profitability and consistent operating results. While GameStop performed well in many of these categories; I discovered that GameStop failed in one significant area. The company had a small competitive advantage with little to no economic moat. I felt that GameStop had no significant barrier to entry that could protect it against the likes of a Best Buy or similar competitor.

GameStop reminds me a lot of Blockbuster in the 90′s. Blockbuster dominated the movie rental business and was the largest chain store rental business in the US. Blockbuster was so large that the company became stagnant and never noticed a small upcoming online retailer called Netflix. Netflix changed the entire movie rental business and Blockbuster is struggling just to stay afloat. GameStop still earns solid profits through its new and used video game sales business. But the company is facing increasing competition from Best Buy, Wal-Mart and Amazon.com. I can’t help but think that over the next 5-10 years digital delivery will be the method of choice for consumers looking to purchase video games. Unless GameStop changes it business model and is the leader in digital delivery; the video game retailer will likely find itself obsolete.