Is GameStop's Nightmare Finally Over?

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"I am pleased to announce that 2012 is officially over." That's how GameStop (NYSE: GME  ) CEO J. Paul Raines opened his company's fourth-quarter earnings call last week.

And who can blame him? It's not hard to see why the video game retailer was so eager to put 2012 behind it. As the gaming industry slogged through its seventh year between new consoles, the sales slump was downright depressing. The market shrank by 21% on the software side, and by 25% in hardware sales. As for GameStop, its comparable sales fall by a brutal 8% on the year.

But the company thinks that the industry's worst days are just about over. At least one new major console, Sony's (NYSE: SNE  ) PlayStation 4, will go on sale soon. And while Microsoft (NASDAQ: MSFT  ) hasn't made any concrete announcements, it could be prepping a next-generation Xbox for a holiday release as well.

The introduction of two new consoles could really goose GameStop's business next year. The company projects that 2014 will bring market growth of between 20% and 30% under that scenario. That forecast might even prove conservative. In their first full year after introduction, the PlayStation 3 and the Xbox 360 consoles boosted Sony's and Microsoft's gaming sales by 31% and 59%, respectively.

There's just one problem with that rosy outlook, though. This isn't 2007. Games are a lot more mobile, and a lot more downloadable now. It's debatable whether consoles will even have another generation after this latest one.

And we've already had one new console hit the market, which wasn't enough to save the company from reporting its eighth consecutive quarterly sales drop. What's got GameStop so confident that the next two consoles will do what the Nintendo Wii U couldn't?

In short, it's pent-up demand. GameStop's recent survey of its customers shows that a huge portion of them plan to purchase the Sony console when it comes out. More gamers want to buy a PlayStation 4 than even a smartphone or tablet in the next year.

Source: GameStop.

If gamers really do come out in droves once Sony and Microsoft release their new game systems, then GameStop has every reason to expect a brighter future. The company increased its market share in 2012, despite the shrinking pie. And that puts it in a solid position to benefit from the bounce -- if and when the video game market rebounds.

While Sony and Microsoft have been taking the headlines when it comes to console gaming, Fools following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. Our new special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.

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Related Tickers

9/30/2016 4:04 PM
GME $27.59 Up +0.45 +1.66%
GameStop CAPS Rating: **
MSFT $57.60 Up +0.20 +0.35%
Microsoft CAPS Rating: ****
SNE $33.21 Down -0.03 -0.09%
Sony CAPS Rating: ***