Did Sony Just Save GameStop Stock?

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GameStop's (NYSE: GME  ) stock has undertaken an incredible rise over the past year, shooting up more than 83%. While investors have profited, however, this company has faced threats to its present and future. The video gaming industry has turned down as current-generation consoles show their age, and while next-generation consoles in Microsoft's (NASDAQ: MSFT  ) Xbox One and Sony's (NYSE: SNE  ) PlayStation 4 are set to be released later this year, even bigger challenges for this stock have arisen.

Microsoft's console won't block used game sales as earlier rumors had predicted, but the company has promoted a digital future for its games that could circumvent GameStop's reliance on the used games markets. All eyes turned to Sony on Monday at this year's Electronic Entertainment Expo, or E3, where the company was set to release new details about the PS4. Did Microsoft's rival take a similar action and pound another nail into GameStop stock's future?

Sony rides to the rescue
Sony released a number of details about its PS4 on Monday, but a few points hit home for GameStop investors. The company statedthat the device will support used games, much as Microsoft did, but Sony made an important distinction from its rival. The company announced full support for trading, lending, or reselling games, without releasing any sort of restrictions. Furthermore, Sony said that the PS4 won't have any sort of online verification system like Microsoft's Xbox One, which requires games to be connected to the Internet once every 24-hour period in order to continue working.

Why are these details such a big deal? Although Microsoft announced a murky support for used games, the company released stipulations: Customers can only lend each individual game out once and can only do so to others who have been on their online "friends" list for at least 30 days. Additionally, game publishers can choose to add in fees or other terms in regards to loaning out their games. All of that hurts GameStop's future with Microsoft's Xbox One.

Sony's announcement came as a breath of fresh air for GameStop. While the company could certainly release restrictions at a later date while not in the spotlight of E3, as for now, Sony's used games model is little more than a rehash of the current video game economy. That's appealing to change-averse customers looking to upgrade to the next generation with a minimum of adaptation, and maintains the environment that provides the foundation of GameStop's business.

Nintendo (NASDAQOTH: NTDOY  ) has struggled mightily with its newest console, the Wii U, but its latest product also supports used games. That gives GameStop a route to continue its current business with two of the three major consoles of this next generation. However, investors shouldn't count on Nintendo being a huge player in the future once Microsoft and Sony launch their new systems. The Wii U sold just 75,000 consoles in April, a double-digit fall from March. Worse, the console, released just last year, sold less than half the number of Xbox 360s or PlayStation 3s sold during the month -- and each of those consoles are at least six years old.

Unless Nintendo releases something mind-blowing soon, the battle for next-generation dominance will be between Sony and Microsoft.

Microsoft's policies will certainly crimp GameStop's sales of Xbox One games, but Sony chalked another point in the retailer's favor on Monday. Microsoft and Sony are locked in a tight battle for next-gen sales, and Sony's announcement that it will price the PS4 at $399 -- a full $100 below the Xbox One's price -- will win over a fair share of consumers. Any lead the PS4 gains over the Xbox One will indirectly help GameStop's own sales.

GameStop's not safe yet
Does that make GameStop a safe stock? Hardly. The company will still face major pressure from Microsoft's attempt to pivot away from used games. GameStop's sales will see a boost from new console sales late in the year, but that excitement will die down as the market becomes more familiar with the PS4 and the Xbox One over the long-term.

Additionally, the company's been unable to turn to mobile and digital sales as a pillar of its financial foundation. While such sales grew more than 21% last year, they still sharply trail game software and hardware sales as a portion of the company's total revenue. Even if GameStop manages to continue driving its mobile and digital business higher, it's hard to see that overcoming potential losses from Microsoft's push against used games.

That's all assuming Sony doesn't release any restrictions on used games between now and the release of its PS4. If it does, this stock's in even deeper trouble.

For now, Sony's E3 announcement breathed a little life back into this stock, but GameStop's future isn't secure just yet. The stock's recent run-up doesn't look sustainable with a cloudy future before it, and the company will have to count on Sony sticking to its commitment to used games. If you're looking to invest in the video game market, GameStop is anything but a risk-free pick.

Is Microsoft losing the battle for next-gen sales?
Sony's announcements offered another source of frustration for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunity is huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On June 12, 2013, at 2:34 AM, Mattenth wrote:

    I think GME is in HUGE trouble. It's fairly surprising that the problems that GameStop was facing are being downplayed with the stock surge over the past year. I'm happily shorting GameStop now at 38.

    The major threats are...:

    - Digital Distribution. Both consoles have a 500gb hard drive. The only reason to have that size is so that you can download games. Most people use their CURRENT consoles to access digital distribution games (like Game-of-the-Year winners "The Walking Dead," "Journey," and "Minecraft"), and other digital distribution services like Netflix. The only reason digital distribution hasn't taken off yet is that most consoles in this generation are 20gb or less.

    - Publishers cutting out used games. Both Sony and Microsoft have said that if publishers want to utilize DRM, they can.

    - Game Subscriptions - Sony requiring playstation plus for multiplayer - now tons of people will get access to a large library for free as they start subscribing. Gaikai is going to offer a huge library, and could be a subscription basis. If it works for Netflix and movies, why not games?

    - Changing business landscape. Sony has some GREAT Free-To-Play titles like Dust 514, Warframe, and Planetside 2. Big-budget games aren't the only players now, either - we've seen a swath of great games that are $30 or less capturing the market, and most of them bypass retailers or offer them tiny margins.

  • Report this Comment On June 13, 2013, at 9:11 AM, Burstedbladder wrote:

    i am not putting a lot of trust or faith in the Sony PS4. They have the ability to sell you the system, allow you to play used games, but they also have the ability to install a firmware update to take that away from you at any given time. I would not buy a PS4 or an Xbox any longer.

    Hopefully Nintendo will come out with something a lot better than what both Xbox and PS4 is offering to the consumer.

  • Report this Comment On June 13, 2013, at 2:16 PM, Efernal wrote:

    I'm seeing alot of wrong info in the comments here. Nintendo can't come out with a new system as the Wii U only launched last year.

    As for hard drive space I have a "cheap PS3 and it has a 60 gb HD and my Xbox 360 has a 60 gb HD. The Xbox 360 did come with a 256 mb card for its arcade version at launch and a 20 gb HD for the pro model at the same time. Even a cheap guy like me upgraded the HD when the time came to do so.

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