Power Up Your Portfolio with GameStop

 Investors of GameStop (NYSE: GME  ) (NYSE: GME  ) (NYSE: GME  ) have enjoyed a 50% pop since late May. While past results cannot and should not be used as an indicator of future performance, I believe there is further upside, and that the stock will continue to outperform the market.

Strong initial demand for new consoles and games
I called several random GameStop locations throughout the country, and the results of my unofficial survey pointed to strong pre-order demand for the new Xbox One and Play Station 4 consoles. In fact, the company halted both pre-orders because demand was too high. The company has confirmed over 1 million names are waiting for a PS4 in its "first to know" list, while Xbox demand has garnered 700,000 names. Users on this list are notified when inventory is available for purchase. Analysts and gamers are expecting the console-launches to be the biggest in history.

Supply for new consoles is typically limited during the early stages of a launch. Considering GameStop's global distribution, significant market share, and expertise, it is likely to receive more than its fair share of inventory during the upcoming holiday season.  

The high level of consumer interest is consistent with remarks from leading publishers such as Activision Blizzard  (NASDAQ: ATVI  ) (NASDAQ: ATVI  ) (NASDAQ: ATVI  ) , which designs one of the best-selling game franchises of all time, Call of Duty.  The newest game, entitled Call of Duty: Ghosts, is expected to gross more than $1 billion in sales, according to analysts at Wedbush.

The company plans to launch Call of Duty: Ghosts on the Xbox 360, Playstation 3, Xbox One, PlayStation 4, PC and Wii U.  To match the highly-anticipated release, Activision has made substantial investments to make "Ghosts" a showcase for the next-gen consoles with its own dedicated servers for the Xbox One version.  In addition, it is embarking on a massive marketing campaign by teaming up with Monster Beverage.  

GameStop is offering free bonuses to clients that pre-order Call of Duty: Ghosts. Activision's site indicates that a "personalization pack" is available exclusively through GameStop pre-orders. GameStop also introduced a new policy in which gamers who purchase a copy of the game for the PS3 or Xbox will be able to upgrade that title to a PS4 or Xbox One for only $10.  

Activision is likely to duplicate the success that the company has seen with the previous installment of the series, Call of Duty: Black Ops II.  The game grossed over $500 million in sales in the first 24 hours.  Since the game was released in November 2012, shares of Activision have risen 35%.

Source: Yahoo! Finance

The biggest game ever at GameStop
Take-Two Interactive (NASDAQ: TTWO  ) (NASDAQ: TTWO  ) (NASDAQ: TTWO  ) is another video game publisher with well-known and popular franchises, such as Grand Theft Auto.In September, Take-Two will release the next installment, Grand Theft Auto V, on the Xbox 360 and PS3. Management feels the game will be the "biggest, most dynamic, and most diverse game the label has ever created." Take-Two provided strong guidance that relates to pre-orders, saying "With a strong pre-order campaign, the title is lining up to be both the biggest launch in the history of the franchise and Take-Two."

An article from The Wall Street Journal estimates that shares of Take-Two Interactive may jump 30% following the highly anticipated release.  I believe this is achievable considering previous games in the series have sold more than 125 million copies while earning some terrific ratings.  With GTA V on the horizon, Take-Two is another great way to gain exposure to the game sector.  

The payoff
The model that GameStop uses helps to differentiate it from the likes of Wal-Mart and Amazon.com. With the company accepting trades for mobile phones, tablets, and other electronics, GameStop should be able to gobble up market share.

One example of this opportunity is the current promotion in which it is offering an additional 30% trade-in credit for swapping eligible devices such as iPads toward the new PS4. These types of differentiated promotions (which are virtually non-existent elsewhere) represent key competitive advantages, especially in the early stages of the console cycle.

The company's successful loyalty program is also unique. In 2010, GameStop launched PowerUp, which became a quick success and has grown to over 20 million members who spend an average of $366 per year. With such a large loyalty program, GameStop now has unique insight into its customers and can use this information to communicate targeted promotions, which should also drive further gains.

The company recently disclosed that 57.7 million shares were purchased last year at an average price of $21.25 for a total of $1.2 billion. Going forward, it is reasonable to assume GameStop will continue allocating excess cash into buybacks, which will prop up earnings.

Conclusion
After reviewing key aspects of the business, data seems to indicate the stock has room to run. Short term, the company will benefit from what appears to be a successful launch of the next-generation consoles. Going forward, GameStop should be able to maintain momentum by capitalizing on its competitive advantages.

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