GameStop Won't Stop Growing

What does a company have to do to impress Mr. Market these days?

Video game retailer GameStop (NYSE: GME  ) just reported a very good quarter, where earnings of $0.37 per share beat the high end of management guidance by $0.05. Earnings rose 151% year over year, while revenue jumped by 42% to $1.81 billion.

You might expect a report like this to boost the share price a bit, especially when CEO R. Richard Fontaine says that he is "very bullish on the future as three major metrics are transforming the business and accelerating the potential for GameStop growth," but you'd be wrong. GameStop was down 4% yesterday on the news.

Whatever the market may think, those three transformative metrics make sense. First, the installed base of current-generation game consoles like the Sony (NYSE: SNE  ) PlayStation 3, Microsoft (Nasdaq: MSFT  ) Xbox 360, and Nintendo (OTC BB: NTDOY.PK) Wii grew by 31 million units last year, expanding GameStop's addressable market by about 34%.

Second, gamers are not just the stereotypical young males anymore: Fontaine says that 38% of gamers are female. He should primarily thank Nintendo for targeting nontraditional gamers, but music fans have also been enticed by rhythm-based games like Activision's (Nasdaq: ATVI  ) Guitar Hero. Wherever new gamers are coming from, the market is growing.

Third, the upcoming slate of games includes sequels to three of the industry's best-selling franchises. It also doesn't hurt that Take-Two Interactive (Nasdaq: TTWO  ) just released its record-breaking Grand Theft Auto 4 only five days before the end of the quarter, bleeding sales into the next period. The company pumped out bestsellers based on the GTA3 engine for seven years, and this new platform should spawn a few follow-ups of its own -- which is obviously good news for GameStop.

The video game market is exploding these days. Games are edging into new demographics as game publishers get creative with the capabilities of the latest hardware platforms. And the buzzword of the day is interactive marketing. GameStop is building out its store network to take advantage of these trends; perhaps investors are scared of the large capital expenses this entails.

Mr. Market is hard to please, but he'll come around eventually. There's no time like the present to take advantage of a trend, and I think GameStop's expansion plans are very smart.

Further Foolishness:

Microsoft is a Motley Fool Inside Value selection, and Take-Two Interactive Software is a Motley Fool Rule Breakers pick. Nintendo, GameStop, and Activision are all Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, but he does own a Wii and a Dreamcast. You can check out Anders' holdings if you like, and Foolish disclosure hangs out in the Foolish game room a lot.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 23, 2008, at 12:38 PM, drowley wrote:

    While console gaming will continue to grow aggressively, online distribution of gaming titles will become much more mainstream - making GameStop the 'Blockbuster Video' of the gaming world - not a great business model.

  • Report this Comment On May 26, 2008, at 11:44 PM, esxokm wrote:

    This is a difficult one. As someone said (I think it was the bald guy from "Fast Money", but I may be wrong about that), when a stock goes down on a great earnings report, there might be some issue with the company.

    However, I can't help agreeing with Anders. The stock might see rough times during the summer doldrums, but that might be the right time to buy, ahead of the upcoming holiday season.

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