New Hardware Should Lead GameStop Corp. (GME) Back to Growth

The world’s largest retailer of video games and their accessories, GameStop Corp. (NYSE:GME), has grown its revenues incredibly over the last decade (see below).  Shareholders have been rewarded nicely, with shares rising from a low of $3.75 in 2004, to the current level of around $25.  However, after several years of slow growth, followed by a decline in revenues during the current fiscal year, is the time right to buy GameStop, or should investors run away?

GameStop Corp. (NYSE:GME) operates almost 7,000 stores worldwide under the brand names GameStop, EB Games, and Micromania.  The company sells new and used video game hardware (like consoles, controllers, etc.) and software.  The company also publishes Game Informer magazine, which is the largest video game magazine in the U.S. with about 5.7 million subscribers.

In my opinion, it is their used equipment business that allows GameStop to be competitive with online retailers such as Amazon.com (NASDAQ:AMZN).  While GameStop will never be able to completely price-match on new equipment (this has been the thorn in the side of physical retailers over the past decade or so), they will still sell a sufficient amount of new equipment through the traffic in their stores generated by used video games and accessories.

I know what you’re thinking: Amazon sells used video games too!  That is true, and often times the pricing is less than at a GameStop store.  When buying a new PlayStation 3, consumers know that they are getting the exact same thing whether they buy online or at the store.  With used video games (or anything used for that matter), the quality of the product varies tremendously.  For that reason, being able to physically see the condition of the items in the store is a huge advantage.

The used business is what has kept GameStop growing in the changing retail environment, but why do I think the company will again be able to grow its revenues going forward?  The simple answer: The current consoles are getting old.  The two most popular video game consoles right now are the PlayStation 3, made by Sony (NYSE:SNE) and the Xbox 360, made by Microsoft (NASDAQ:MSFT).