All of the short-sellers that have been betting against GameStop Corp (NYSE:GME) in the past could have been wrong. I’ve been constantly impressed by the company’s ability to generate cash flow, and return value to shareholders. The stock has done relatively well, considering the high amount of short interest (48% of float according to Yahoo! Inc. (NASDAQ:YHOO) Finance). However, there are two challenges coming, and GameStop Corp (NYSE:GME) has not faced these issues before.
GameStop Corp (NYSE:GME) is actually doing amazingly well considering the existing threats the company faces. On the one hand, the company faces Amazon.com, Inc. (NASDAQ:AMZN) and their cut-throat pricing, and willingness to take a loss to gain market share. Amazon.com, Inc. (NASDAQ:AMZN) gets about 64% of their sales from electronics and general merchandise, and this segment grew revenue by 30% in the last quarter.
On the other hand, GameStop Corp (NYSE:GME) has to compete against Best Buy Co., Inc. (NYSE:BBY) and Wal-Mart Stores, Inc. (NYSE:WMT). Best Buy Co., Inc. (NYSE:BBY) devotes a huge section of each big box store to games. The company carries the latest consoles, hundreds of new games, and has been increasing their used game selection. However, somewhat due to Amazon.com, Inc. (NASDAQ:AMZN), and somewhat due to their own problems, consumer electronics same-store sales were down 5.4%, and entertainment sales were down 28% in the current quarter.
Walmart carries just enough games and consoles to be a pain to each of these companies. The company estimates that over 200 million people visit their stores worldwide each week. The fact is, many shoppers will buy games at Walmart because they are already in the store buying groceries and other items. Why make a separate trip to GameStop Corp (NYSE:GME) if they don’t have to?
This would be a good investment…
While the company’s total sales down 6.8%, and same-store sales down 6.7%, speaks to trouble, GameStop Corp (NYSE:GME)offers a decent value to investors. The stock pays the highest yield of the group at about 3.4%, versus 2.5% from Best Buy, 2.4% from Walmart, and nothing from Amazon.com, Inc. (NASDAQ:AMZN).
In addition, the company offers investors the best relative value of their peers. Analysts expect GameStop to increase EPS by 10% over the next few years. By comparison, Best Buy is expected to show a 3.33% decline, and Walmart is expected to see 9.29% growth, and we will get to Amazon.com, Inc. (NASDAQ:AMZN) in a minute.
GameStop also offers the lowest projected P/E ratio at about 10, compared to 12 at Best Buy, and over 14 at Walmart. Considering that Best Buy and Walmart have lower growth rates, and lower yields, it’s no surprise that GameStop seems to be a better value. Where Amazon.com, Inc. (NASDAQ:AMZN) is concerned, the company carries a projected P/E ratio that is over five times its growth rate. With GameStop trading for about equal to its growth rate, Amazon is priced for perfection plus some.
…But, two threats could end this game
The two threats on the horizon, come from Microsoft Corporation (NASDAQ:MSFT)’s new Xbox One, and Sony Corporation (ADR) (NYSE:SNE)’s Gaikai streaming service. The Xbox One poses a challenge to everyone in the used game business. Microsoft Corporation (NASDAQ:MSFT) will lock each game to a gamer’s Live account. If they want to sell the game, there will be an “unlock” fee to do so. It’s very likely this will put a damper on selling used games, and may drive sales even further toward digital receipts.
If gamers have to pay $10 to “unlock” a game and sell it, this may eliminate certain sales completely. A game worth $10 today, might be worth nothing with this unlock fee. Let’s say you want to buy Call of Duty: Modern Warfare 2. You can buy it online for $29.99, or you can buy it in the store (at a higher price because of the unlock fee) for $40, which are you likely to do?
The second threat comes from Sony Corporation (ADR) (NYSE:SNE)’s Gaikai service. For those who aren’t aware, Gaikai will offer the ability to stream games from the cloud to not only consoles, but also televisions, PCs, and tablets as well. This service’s vision is, to offer current graphic intensive games through the cloud. Since the platform doesn’t matter, used game sales could be a thing of the past. Imagine being able to stream a PS2 game, and then minutes later playing a PC game. With inter-changeable content, used game discs would seem antiquated.
With these two threats coming to market near the end of the year, GameStop could be in real trouble. If gamers aren’t willing to deal with used games the way they do now, almost 48% of GameStop’s income is at stake. While the company does make money on new hardware and software, used games are its bread and butter. If these two threats hurt the company’s used game sales, it could be game over for this retailer.
The article The Game Has Changed originally appeared on Fool.com.
Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and GameStop. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
