While being lazy this weekend, I stumbled across one of my favorite picks which I had last covered a long time ago. What pleased me is that the stock has returned almost 50% since I last looked at it more than 9 months ago, compelling me to take a detailed look at it once again.
Being a video game enthusiast, the terrific stock price appreciation of video game retailer GameStop Corp. (NYSE:GME) certainly brought a smile to my face. While the Street was clamoring about GameStop Corp. (NYSE:GME)’s dying business, I had faith. The company was trying to turn around. It was trying new things — such as selling pre-owned games and devices, and boosting digital content sales among other things.
Such moves led me to believe that GameStop Corp. (NYSE:GME) had a fight left in it, and not everything was lost. The stock’s solid performance vindicates my view, and the fact that it jumped around 5.8% last week even after issuing a gloomy outlook suggests that investors are optimistic about its prospects.
Light at the end of the tunnel
GameStop Corp. (NYSE:GME) handily beat analyst estimates in the previous quarter, posting revenue of $3.56 billion and adjusted earnings of $2.16 per share. Analyst estimates called for revenue of $3.46 billion and earnings of $2.09 per share. Same-store sales declined 4.6% and revenue was almost flat from last year, as weakness in GameStop Corp. (NYSE:GME)’s traditional business was offset by its new strategies.
However, the company’s outlook wasn’t exactly awe inspiring. GameStop expects to earn $2.75 to $3.15 a share this year, which lags the analyst consensus of $3.38 per share by quite some distance. Despite this, positive commentary from management about the company’s prospects later this year gave confidence to GameStop Corp. (NYSE:GME) bulls.
Booster packs
GameStop’s console business — which includes hardware, software, and digital and forms its core — has been hurt in recent times as the current console generation is at the end of its lifecycle. This has led to declining hardware and software sales, as consumers have been putting off their purchases while waiting for the next gaming console generation.
As a result, GameStop expects a weak 2013, but it is highly optimistic about the following two years for reasons which are very simple. The company expects its resurgence to begin in the back-end of the year, when the first of the next-gen consoles in the form of the Sony Corporation (ADR) (NYSE:SNE) PlayStation 4 is expected to arrive.
Sony had held an event earlier this year, where it revealed the technical specifications and showed-off the controller. However, there was no concrete announcement regarding pricing or availability, but Sony would probably make the console available just before the holiday season this year. GameStop expects that the introduction of just the PlayStation would lead to double-digit console growth in 2014, while the addition of the next version of Microsoft Corporation (NASDAQ:MSFT)’s Xbox would propel console growth in the 20%-plus range.
The launch of new consoles will undoubtedly lead to better times for GameStop, as the launch of the Nintendo Wii U already had a positive effect on sales in the previous quarter. In comparison, the launch of much more famous consoles from Sony and Microsoft should have an even greater effect.
Game over? Or just a difficult level?
However, there are a few riders — such as price of new consoles, availability of titles, game pricing – which can affect console sales. But, the most threatening ones for GameStop are the method of delivery of games and probable blockage of used games.
Neither Sony nor Microsoft have cleared their stance about whether or not they would allow used games on the next-gen consoles. Rumors suggest that Microsoft’s next Xbox would allow users to download a game and install it on the hard-disk, while Sony might be devising a method wherein only one user can use a single copy of a particular game.
If such rumors actually turn out to be true, then sales of new consoles may take a hit by as much as 60% according to GameStop. If Sony and Microsoft are listening, then I doubt that they will prevent used games or altogether stop selling physical copies of games.
Moreover, downloading games, as Microsoft might be considering, would require users to be connected to the internet, and require a large amount of data transfer. This might not be too appealing for consumers. Thus, it seems highly unlikely that either Sony or Microsoft would take such a path and antagonize potential buyers.
And as far as delivering digital downloads is concerned, GameStop is already made significant progress. Its digital revenue has grown at a compounded annual rate of 48% over the past two years. PC digital download sales improve a massive 68% in the previous quarter, and in-game transaction revenue shot up 116%.
Attention!
Gaming ahead
In addition, new titles will also drive GameStop’s results later this year. The release of Battlefield IV by Electronic Arts Inc. (NASDAQ:EA), and Grand Theft Auto V by Take-Two Interactive Software, Inc. (NASDAQ:TTWO) would undoubtedly be tailwinds for GameStop. Battlefield 3 was EA’s fastest selling title, selling more than 5 million copies in a week and raking in more than $300 million during that time span. The next iteration of the highly successful game is scheduled for release this fall, and the game is already up for pre-order.
As far as Take-Two’s GTA V is concerned, expectation on the Street is that it will outsell its predecessor and might even become the best-selling game of all time.
The bottom line
With so many exciting developments on the horizon, it would be foolhardy to call GameStop’s business outdated. The company has endured troubled times, but looks well-positioned to profit from the next console cycle and blockbuster games. The stock has rallied on investor confidence, and I don’t see any reason why that confidence should waver now. Moreover, GameStop’s solid dividend yield of 4.3% and share repurchases indicate are bonuses why you should consider holding on to it.
All in all, it’s not yet game over for GameStop.
The article Game Over for GameStop? Nah…It’s Ready to Go Up One Level originally appeared on Fool.com is written by Harsh Chauhan.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
