Everybody seems to be rooting against GameStop Corp. (NYSE:GME). The video-game retailer is clutching a business model that game publishers hate. After all, they see none of the profits when GameStop sells a used copy of one of their titles.
Console makers are gunning for GameStop Corp. (NYSE:GME), too, with Microsoft Corporation (NASDAQ:MSFT) and its Xbox One leading the way in pushing to kill the need for video-game discs. And the bearish sentiment against GameStop is through the roof. The stock is one of the market’s most hated, notching short interest of almost 30%.
Yet investors in GameStop Corp. (NYSE:GME)’s shares have a simple answer to all of that negativity: “scoreboard.”
After finishing 2012 on an epic 75% run, 2013 has been almost as kind to the company’s stock. GameStop Corp. (NYSE:GME) is up 47% so far this year, and more than 100% in the past 12 months.
What, me worry?
GameStop Corp. (NYSE:GME) can thank the lifting of uncertainty around the next-generation consoles for much of that gain. Rumors have been swirling that Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE) aimed to blockade used games from their new systems. Considering that GameStop Corp. (NYSE:GME) made $1.17 billion in profits from the resale of used games last year, a move like that could be lethal to its business.
However, that completely digital future looks to be at least one console generation away. Microsoft announced last week that it will allow for the resale and trade-in of games on the Xbox One, and GameStop’s shares rallied 6% after the news.
But GameStop’s good fortune hasn’t all been at the hands of other companies. It has made some shareholder-friendly moves lately that the market loves. GameStop used much of its ample cash flow to initiate — and then raise — a dividend. The company also spends heavily on stock buybacks. It shrank its outstanding share count by 25 million, or 17%, in just the past two years.
And GameStop has also made solid progress in diversifying its business. The company’s “other” sales category, which includes digital sales, used electronics, and non-game retail, grew to $1.5 billion last year, to nearly 20% of its total revenue. It is still heavily levered to physical video game retail, but that’s far from the only card that GameStop has to play.
The future is cloudy
So what’s the future look like for this company? Just as rocky as its recent past.
GameStop is heading into a dangerous period in the console cycle. The company typically books its worst profit margins in the months right after new console introductions. That’s a tough time because new hardware sales are a low-profit business. And worse yet, because all the games are brand-new, it will be a while before a vibrant used game market develops.
Sony Corporation (ADR) (NYSE:SNE) could also throw a curveball at this week’s E3 conference regarding how it plans to handle used games on its own system. It’s unlikely that Sony will go further than Microsoft in policing trade-ins, but the company could still announce policies that would whack GameStop’s business.
