Is This the Next Industry to Be Disrupted?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today. started selling books in '95, and since then it's grown into one of the largest e-commerce companies in the world. The online retailer wreaked havoc on the brick-and-mortar book business throughout the early 2000s, eventually helping put one of the largest book stores, Borders, out of business in 2011. 

The remaining book retailers, Books-A-Million and Barnes and Noble, are struggling to stay relevant in an industry that is rapidly becoming digitalized. The introduction of e-readers and tablets have all but sealed their fates. Both companies have lost around half of their market capitalization over the last five years. 

In thinking about just how disruptive Amazon has been to the book industry, I'm struck by the notion: How long can GameStop (NYSE: GME  ) fend off the transition to digital?

The video game retailer has enjoyed impressive performance over the last nine months , up more than 160%. Microsoft (NASDAQ: MSFT  )  did, however, give GameStop quite a scare earlier this year by announcing that it would not allow game-sharing with its soon to be released Xbox One game console. GameStop tanked 20% the week following Microsoft's announcement.

The outrage and backlash by gamers was astounding. And when the other major game console maker, Sony (NYSE: SNE  ) , announced that it would allow game sharing (the opposite of Microsoft), Microsoft had no choice but to reverse its policy and apologize to its loyal following. Soon after, the market completely forgot about the incident, and GameStop was back in investor's good graces. I think they were too quick to forgive and forget. 

For a company that derives half of its gross profits from pre-owned games, GameStop's retracement to $50 per share seems rather irrational. This is especially true when you think about what the digitizing of video games could ultimately do to GameStop's business model -- it could effectively render its model nonexistent.

New consoles
The big news that's overshadowing GameStop's major headwinds is the upcoming launch of new consoles, Sony's Play Station 4 and Microsoft's Xbox One. The coming to market of these consoles should give GameStop's top line a boost, and so investors are choosing to focus on the near term, rather than the long-term. 

The game change for GameStop? A move to digital. Currently, gamers can only download a few games directly off of the Internet. But if the digital transformation in the book industry is any indicator, I think the rise of digital and downloaded games is just on the horizon. Especially when you throw in the convenience that downloaded games offers. 

From an investment standpoint
In looking at the three companies above, it appears Microsoft and Sony are much better investments than GameStop. Microsoft and Sony are not only bringing new consoles to market, but they also have other tailwinds.

For Microsoft, this includes the fact that CEO Steve Ballmer is set to retire within the next 12 months. A fresh face will do wonders for a company in transition. Microsoft has already announced a restructuring and realigning of divisions, putting the company in turnaround mode. And with a pristine balance sheet, Microsoft might look to go on an acquisition spree to reinvent its business -- hence the recent Nokia acquisition. And who knows, maybe Bill Gates will pull a Steve Jobs and make a comeback!

As for Sony, the company has activist support. Billionaire Dan Loeb and his Third Point hedge fund are pressing the company to spin off its entertainment arm. With the news, Sony is now trading at over 35 times earnings and is up 75% year- to-date. But never fear, there could still be upside to the stock. Analysts expect EPS to grow at an annualized 55% over the next five years; quite impressive by any measure. And In his letter, Loeb outlines a price target of around $26, suggesting there's still significant upside to the stock. 

Bottom line
Basically, I am beginning to question GameStop's long-term sustainability. With the uncertainty surrounding its business model, I think the stock should trade at a discount to the industry, and not the premium it's currently at. GameStop trades at 7.6 times EV/EBITDA, which is above top peer Best Buy's 6.4 times. Meanwhile, both Microsoft and Sony are long-term investments worth owning. 

The tech world has been thrown into chaos as the biggest titans invade one another's turf. At stake is the future of a trillion-dollar revolution: mobile. To find out which of these giants is set to dominate the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate, and we'll give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2636886, ~/Articles/ArticleHandler.aspx, 9/29/2016 11:32:03 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 hours ago Sponsored by:
DOW 18,143.45 -195.79 -1.07%
S&P 500 2,151.13 -20.24 -0.93%
NASD 5,269.15 -49.39 -0.93%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/29/2016 4:01 PM
GME $27.14 Down -0.35 -1.27%
GameStop CAPS Rating: **
MSFT $57.40 Down -0.63 -1.09%
Microsoft CAPS Rating: ****
SNE $33.24 Down -0.34 -1.01%
Sony CAPS Rating: ***