Gamestop Plays It Forward

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Video game retailer Gamestop (NYSE: GME) is putting the finishing touches on its acquisition of EB Games and is expecting the new game software business to "explode" as Sony's (NYSE: SNE) PlayStation 3 (PS3) lands on the market.

PS3 hype is indeed building; in its third-quarter conference call, management commented that the gaming console is being sold at a huge premium in the aftermarket, after gamers snatch up the limited supply currently available at Gamestop and sell it on eBay (Nasdaq: EBAY). The company is sold out of PS3s and Nintendo's recently released Wii, but expects to receive more hardware on a weekly basis as the ultra-important holiday season arrives.

Microsoft's (Nasdaq: MSFT) Xbox 360 is already doing well in the market and contributed to a 69% increase in hardware sales for Gamestop's third quarter. Popular titles include Electronic Arts' (Nasdaq: ERTS) Madden NFL 2007, which management also mentioned as the most popular title on PS3. It also detailed that older console sales are still selling well, as more price-sensitive consumers find the $129 PS2 sales price compelling. Older units also drive Gamestop's used video game sales.

But right now the industry is on the cusp of a cyclical upswing as new console introductions will lead to powerful growth in complementary software and accessory sales. These cycles tend to last five years or more, and the rising tide of demand can lift all ships competing in the space, be it the hardware creators, software developers, or retailers.

The good thing about Gamestop is that it benefits regardless of which platforms or games prove the most popular. Management announced during the earnings call that it is excited about its prospects and that the product diversification it is seeing is the most widespread ever, with at least six game platforms to meet nearly any consumer preference.

I'm still weighing the investment merits and drawbacks of the stock, as the industry is notorious for volatility related to product shortages, delayed release dates, and fickle consumer tastes that make supply and demand balancing even more difficult. Gamestop shares have been known to swoon following a holiday hangover as sales fail to live up to expectations, but as long as there are enough PS3 devices to go around, this season could prove record-breaking.

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Gamestop, eBay, and Electronic Arts are Stock Advisor picks, while Microsoft is an Inside Value pick.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.