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Is GameStop Back?

GameStop (NYSE: GME  ) had a lot to prove going into its earnings announcement this week. The stock was already near a five-year high before the report, and it's not as if the video game industry has been a great place to do business lately.

In fact, the last time that GameStop reported quarterly growth was in early 2011 when Nintendo was dominating the sales charts with a 3DS Pokemon title. It has been a rough ride from there for GameStop: The company booked shrinking sales in each of the last eight quarters.


Comparable Sales

Q2 2011


Q3 2011


Q4 2011


Q1 2012


Q2 2012

(9.3 )%

Q3 2012


Q4 2012


Q1 2013


Make that nine straight quarters. GameStop's latest report stayed true to form with another dip in sales -- this time by 10.7%. Naturally, the market responded by sending shares up to a new high. What gives?

GME Chart

GME data by YCharts.

New businesses
I see two good reasons for GameStop's epic rally. For one, the company has made excellent progress at building diversity into its business. Back in 2011, GameStop got 87% of its revenue from video game hardware and software products. But since then it has ramped up its digital strategy and built a new revenue stream around the trade-in and resale of mobile devices.

Those two new businesses are on a roll. Mobile sales expanded by 121% last quarter and digital content receipts were up 18%. Thanks to performances like that, GameStop now gets a solid 20% of its revenue from sources other than traditional video game sales.

Industry rebound
But the company's best hope is in a strong rebound in the video game industry. And by that measure, it could be poised to book some fantastic growth in the quarters ahead. The big worry for GameStop has been that gamers won't shell out hundreds of dollars for new gaming consoles this time around. With the surge of gaming on mobile devices and tablets, maybe there wouldn't be room for another expensive entertainment device. But that worry seems misplaced. GameStop is seeing huge demand for pre-orders on its initial allotment of next-gen systems.

And things look even better on the software side. In September Take-Two Interactive launches the widely anticipated Grand Theft Auto V title that is sure to send hard-core gamers flocking to stores. But those customers could find shops already crowded with kids, as Disney's Infinity release is going head-to-head with Activision Blizzard in the $1.5 billion market that it built with its Skylanders franchise. Then the real fun begins, when Activision's Call of Duty franchise reboot hits stores in November around the same time that Electronic Arts launches its competing shooter, Battlefield 4.

A bright outlook
Strong pre-orders of hardware and a stacked game calendar have GameStop feeling lucky. The company is expecting sales growth to return next quarter -- in a big way. It sees comparable sales bouncing higher by 11% to 15%. But even that might prove conservative. There's some serious pent-up demand for fresh gaming hardware and software, and GameStop is one of the few retailers with the national footprint to deliver those new products to gamers.

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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 August 24, 2013, at 4:30 AM, spydi wrote:

    I am not a financial genius, but if you are posting double digit losses, something isn't right. You can blame Sony, Nintendo and Microsoft all you want, but in the end it is your business practices that determine your profit.

  • Report this Comment On August 24, 2013, at 8:57 AM, rsinj wrote:

    In the end, GameStop is no different from Blockbuster and will suffer the exact same result. There is no place for this company in a digital future. Like Blockbuster, they can grasp for straws, but they will not gain any meaningful traction in digital before content producers go direct to consumers completely eliminating the need for this company as it will prove to be cost-inefficient, they will have no margins, and bite the dust.

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