GameStop to Save Best Buy? Really?

We already know that Best Buy (NYSE: BBY  ) stole Christmas. Those seeking out the antidote -- according to Wedbush Securities analyst Michael Pachter -- should turn their attention to GameStop (NYSE: GME  ) .

Really? GameStop?

In a conversation with Barron's Tiernan Ray, Pachter argues that Best Buy is toast as it can't woo the tech-savvy youngsters who do price shopping on the Internet or use the barcode scanning apps on their smartphones to make sure that they are getting the best deal.

I won't argue with Pachter's assessment of Best Buy, but how does that assessment not sink GameStop as well?

The Internet will be even worse for GameStop, because we're barreling toward the inevitability of digital delivery of gaming software.

For now, GameStop is holding up well. Sales climbed 4% to $1.9 billion in its latest quarter on the strength of positive stateside comps. It also boosted its profit guidance for the holiday quarter last month.

Helping GameStop's cause is that video game sales bounced back last month, fueled by the success of Activision Blizzard's (Nasdaq: ATVI  ) Call of Duty: Black Ops and Microsoft's motion-based Kinect controller.

GameStop's small-box model appeals to rushed consumers who don't want to deal with the crowds and a typically longer drive to get to Best Buy. The same thesis hasn't done RadioShack any favors in recent years, but GameStop's niche is special. There's a healthy ecosystem of young gamers who continue to trade in their used games for new titles. Selling used games offers healthier margins for GameStop over moving shrink-wrapped titles.

There's a twofold threat to GameStop's gravy, though. On the one hand, digital delivery doesn't leave any used games behind to trade in. Then there's the competitive threat of Amazon.com, Best Buy, and even Toys R Us -- as all three ramp up their efforts to copy GameStop's trade-in model.

These threats won't be too evident in the near term. GameStop should have a monster holiday quarter. However, just as Research In Motion shares are being held back based on an uncertain future -- instead of its current rapid growth -- any rallies in GameStop's stock have been short-lived.

GameStop isn't the long-term antidote to Best Buy's malaise, though it may do well this particular quarter.

Disagree with me? Let me have it in the comment box below.

Best Buy and Microsoft are Motley Fool Inside Value picks. Amazon.com, Activision Blizzard, and Best Buy are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a synthetic long position on Activision Blizzard and has recommended buying calls on Best Buy. Motley Fool Options has recommended writing covered calls on GameStop and a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard, Best Buy, GameStop, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz loves playing video games but he doesn't own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (2)

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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 December 15, 2010, at 3:25 PM, Slappster wrote:

    This has been your thesis for over a year now. How is it playing out for you?

    What about GameStop's digital initiatives that give gamers store credit for purchasing downloads in the store?

    What about the fact that digital downloads of AAA titles really have not taken off at all? GameStop caters to the hard-core market, not Mom playing Angry Birds on her iPhone.

    What about the utter, abject failure of competing used game programs? Best Buy's is failing - again. Walmart canceled theirs. Meanwhile, quarter after quarter, GME management re-iterates that there has been 0 competitive effect from these programs.

    No mention of ongoing market share gains in new software sales against these terrible competitive threats?

    Rick, when the facts don't match your thesis, you need to re-think your thesis.

  • Report this Comment On December 15, 2010, at 3:40 PM, ycoquoz wrote:

    What about when 3 million people all get on the internet and try and download the same 20gb file in the first 24 hours of the game being released...talk about infrastructure overload..

    At a download speed of 5 MB/sec, it would take more than 9 hours to download this game. You really think that a bunch of impatient, hyperactive 10-16 year olds would not rather preorder the game and pick it up from the store the day it comes out?

    I will most certainly confess that in my teenage years I could not imagine having to wait 9 hours to get a new game once it is finally released when I could instead just walk down the road and physically pick it up.

    Gamestop is actively and properly buying back their shares, has a rock solid balance sheet, and is looking to expand overseas. Investors are reacting to Gamestop like they are to Microsoft with cloud computing. It's time to stop overreacting to over-hyped threats.

  • Report this Comment On December 15, 2010, at 3:56 PM, BioBat wrote:

    Slapster,

    Patcher has been wrong so many times it isn't funny. This is the same guy that called Netflix a garbage company that wasn't worth $3 a share just a few years ago.

    Gamestop isn't even on the map for digital downloads. Steam controls nearly 70% of that market, a market that's at least 30M users strong. It's got PCs, MACs, and will soon add the PS3 to its supported platform.

    And can you really make the claim that digital sales of AAA titles haven't take off at all? NPD doesn't even report them and everyone (including Steam) has kept the data really close to their chests. Only ERTS, who reported 20% of their revenue this year would be from digital downloads, has been forthcoming.

    Digital downloads will be the norm within a few years. Count on it.

  • Report this Comment On December 15, 2010, at 3:59 PM, BioBat wrote:

    ycoquoz,

    You obviously haven't heard of pre-downloads, have you?

    Black Ops was distributed that way through Steam at least two weeks before release. Activation codes were e-mailed the second of the game released so people could be online playing in seconds rather than waiting in line at Gamestop and waiting to get home.

  • Report this Comment On December 15, 2010, at 4:25 PM, seanmkelly11 wrote:

    Activision is definitely doing it right with digital downloads. Black Ops was easy to access the second after activation codes were sent and I downloaded Cataclysm 1 week before the go live date and played 10 minutes after the 3AM EST launch. Digital downloads are much easier for the gamer and better for the company. I definitely agree with the article that Gamestop is going to have it rough after this quarter.

  • Report this Comment On December 15, 2010, at 5:19 PM, BioBat wrote:

    I still think Gamestop has a few quarters to go and if the economy keeps improving they'll stand a little longer but digital downloads are going to outpace physical game sales in the very near future.

    When that happens, Gamestop is going to become a niche store selling nostalgic cartridges and disks within a few years time. Too bad I can already get better prices for all of that stuff on ebay, craigslist, or at the local flea market than I can buying something used from Gamestop.

  • Report this Comment On December 16, 2010, at 3:36 PM, efalco wrote:

    seanmkelly11,

    What are you going to do with your digital copy of Black Ops when the next version of CoD comes out? Just delete it from your drive to make room? I traded in my (disc) copy of MW2, and got $20 towards Black Ops, which I will sell on ebay, or trade in for the next copy.

    How is the digital delivery system working out for the psp?

    Right now, expansion packs for games are easy to access by download, but full games have several years before they become the norm.

  • Report this Comment On December 17, 2010, at 11:13 AM, BioBat wrote:

    efalco,

    the same arguments were made when music started going digital.

    who's going to pay for mp3s when you could buy a cd and sell it later? Answer: nearly everyone.

    To your PSP point, digital delivery works fantastically for getting games on my iPhone and DSi. Sorry if you're stuck with a PSP.

  • Report this Comment On December 17, 2010, at 2:23 PM, efalco wrote:

    BioBat,

    Yeah, youre right, buying a song for $.99, is totally the same thing as paying $60 for a new game.

    Oh, and how large are song files? 5 mb or so? Which takes ~2 mins to download.

    How large is a full game file? 20+ gb? Which takes 12+ hrs to download (~400kb/sec).

    Angry birds, and pokemon games are not the same thing as CoD, Red Dead, Madden, Halo, or anyother full game console franchise.

    But youre right, they are totally the same thing.

  • Report this Comment On December 17, 2010, at 4:20 PM, BioBat wrote:

    efalco,

    I'm not talking about any stupid Angry Birds. You can get Madden, EA Battlefield, Need for Speed, COD-Zombies all for the iPhone. They're not meant to replace your at home consoles, but then again, neither are the DS or PSP.

    Soon you're going to be able to download full games for the PS3, the 360 won't be far behind.

    You're fooling yourself if you think downloading games (yes, even full length games) isn't going to replace physical media in the next few years.

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