GameStop Corp. (GME): What’s the Endgame for This Company?

GameStop Corp. (NYSE:GME) has enjoyed an extraordinary run over the past year, which is interesting considering revenue declined and earnings fell into the red in 2012. With failure of many of its physical video-game store rivals, GameStop Corp. (NYSE:GME) now owns nearly 50% market share for popular gaming hardware and software. GameStop is also the top destination for the buying, selling, and trading of video games. The company has made several strategic moves to help drive top-line growth, but there is one likely outcome that many investors might be overlooking.

Industry trends

GameStop Corp. (NYSE:GME) has an advantage over physical and online rivals for several reasons:

1. Games are early to the market
2. Largest title collection
3. Gamers can trade in their iPhone, iPad, iPod, or tablets for games and accessories
4. The most used games you will find anywhere

Almost half of GameStop’s profits come from used games. At the present time, this is a big positive as demand for used games is high. If you look at the average gamers, they’re in their teens or young adults. Teens can’t afford new expensive titles, and with the middle-income consumer struggling, it’s less likely that their parents are going to shell out $50-$60 for a new video game. Many young adults either have student-loan debt or they can’t find a job. Those who can find a job aren’t likely to be paid well. These individuals would also prefer to spend money on a used game opposed to a new one. This aspect of GameStop Corp. (NYSE:GME)’s business should be sustainable unless a bigger company like Wal-Mart Stores, Inc. (NYSE:WMT) expands its gaming segment and offers a better deal to consumers.

Currently, it doesn’t look like this would be a possibility, but it’s important to understand that Wal-Mart Stores, Inc. (NYSE:WMT)’s ultimate goal is to sell everything at better prices than other retailers, and to simply rely on volume for growth. In other words, Wal-Mart might eventually tread on GameStop’s territory. The good news is that Wal-Mart Stores, Inc. (NYSE:WMT) is highly strategic in its expansion plans, and it believes in a slow, calculated, and steady approach. GameStop Corp. (NYSE:GME) isn’t in its sites yet. GameStop’s PowerUp Rewards program has more than 30 million customers, but customer loyalty will only go as far as the savings that are offered compared to competitors.

Future demand

Despite a weak consumer, future demand for the Microsoft Corporation (NASDAQ:MSFT)’s Xbox One and Sony’s PS4 should be strong. Many gamers are aware that these consoles are supposed to be released during the holiday season, so they’re either waiting for one as a gift from a family member, or they’re setting money aside to make a purchase.

The release dates recently moved from the holiday season to November, but don’t be surprised if they move up to October — both companies will want to get a head start on the other. Regardless of when they’re released, GameStop Corp. (NYSE:GME) sales should skyrocket. The stock has partially been trading in anticipation of this event, and the stock will likely continue to move higher as long as the broader market holds. But there’s one logical problem here: This is likely to be a buy-on-the-rumor/sell-on-the-news event. Sales might be good after the holiday season, but future growth potential will decline. Considering traders and investors like to look ahead, not backward, many of them will exit the trade, which would send the stock price lower.

Good news/bad news

When Microsoft Corporation (NASDAQ:MSFT) announced that Xbox One would be capable of playing used games without a platform fee, it sent GameStop’s stock higher. That was the good news, but the bad news is that Microsoft has the big picture in mind, which is to control the digital gaming market in the future. Microsoft Corporation (NASDAQ:MSFT) has a long way to go to get to that point, but once it does, it could spell doom for GameStop Corp. (NYSE:GME).

Conclusion

If you’re looking to play current trends in the video-game market, then GameStop has the most near-term upside potential. However, this is simply a momentum trade. This is still a company that saw a revenue decline and reported a loss in 2012; it owns a negative profit margin of 3.29%; and much larger companies are likely to eventually catch up to GameStop, putting enormous pressure on the company’s top and bottom lines.

If you want a future play for digital gaming, then consider Microsoft. Of course, Microsoft offers enormous product and service diversification well beyond video games, but if it can set itself up as the sustainable top player in digital gaming, then it will act as a significant revenue stream. Microsoft is already in the game with Microsoft Live Marketplace. Microsoft is also a more resilient stock thanks to its size and diversification. Furthermore, it yields 2.70%, slightly higher than GameStop Corp. (NYSE:GME)’s 2.60%.

Wal-Mart might expand its video gaming segment, but it would only act as a very small portion of the company’s revenue. Plus, even if a physical video game buy/sell/trade performed well, it would only be a matter of time before digital completely took over. If you’re looking for a dividend play, Wal-Mart currently yields 2.50%.

The article What’s the Endgame for This Company? originally appeared on Fool.com and is written by Dan Moskowitz.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft. Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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