Will Sony and Microsoft Save GameStop?

GameStop (NYSE: GME  ) will release its quarterly report on Thursday, and after years of suffering tepid performance, investors have seen their shares more than double so far in 2015. Having made it through an extremely long period without refreshed offerings on the console-game front, GameStop is now looking forward to benefiting from the coming fight between Sony (NYSE: SNE  ) and its PlayStation 4 against Microsoft's (NASDAQ: MSFT  ) new Xbox One. Will GameStop be a winner no matter which console reigns supreme?

GameStop looked like it might be on the road to ruin more than a year ago, as an incredibly weak set of new-release offerings combined with rising competition even on the pre-owned game front, which has historically been the specialty game retailer's strong point. But since then, GameStop has roared back, with the coming Microsoft and Sony game consoles showing just how much pent-up demand there is among gamers to get new offerings onto their screens. With the stock having climbed so far, though, are investors getting ahead of themselves? Let's take an early look at what's been happening with GameStop over the past quarter and what we're likely to see in its report.

Stats on GameStop

Analyst EPS Estimate

$0.57

Change From Year-Ago EPS

50%

Revenue Estimate

$1.98 billion

Change From Year-Ago Revenue

11.8%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

How well can GameStop do this quarter?
Analysts have gotten almost giddy in their views on GameStop earnings in recent months, boosting their October-quarter estimates by more than two-thirds and now expecting about 5% higher earnings for fiscal 2015 than they did as recently as August. The stock has responded in kind, with gains of 16% since mid-August.

GameStop has managed to hold its own in its wait for the new Sony and Microsoft consoles to arrive. In the July quarter, GameStop saw a massive 10.7% drop in same-store sales, with earnings falling by about half. Yet investors didn't let themselves get discouraged by those much-expected results, as they instead looked toward new game releases in the Grand Theft Auto and Call of Duty series to help GameStop tread water until the lucrative new consoles finally arrived in time for the holiday season.

Moreover, GameStop has defied many experts' calls that it would quickly become irrelevant in the growing push toward mobile gaming. The company's loyalty program has grown extensively, giving GameStop the information it needs to manage its inventory more effectively and cut its costs, boosting margins. Moreover, GameStop's initiatives to build up its mobile business have reaped considerable rewards, and the retailer has also managed to gain market share even as overall sales levels have been weak.

Perhaps the best news for GameStop, though, is that even as most investors point to the consoles as driving potential growth for GameStop,  it's been actual physical games that have been selling quite well in recent months. That suggests that the good times could come early for GameStop even though the sales of new consoles won't show up in October-quarter numbers. It also raises the possibility of continuing demand for Microsoft's and Sony's older-model consoles going forward.

In the GameStop earnings report, watch to see whether the company comments on early sales of now-obsolescent PlayStation 3 and Xbox 360 game consoles. As more gamers upgrade, a thriving market for these old consoles might play a big role in GameStop's recovery. Since all of this activity is likely to have happened after the end of the October quarter, it'll be essential to look at GameStop's guidance to see if the company gives early indications on how November has gone.

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Editor's note: A previous version of this article incorrectly stated that the PlayStation 4 and Xbox One would be backward-compatible. The author and the Fool regret the error.


Read/Post Comments (7) | 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.

  • Report this Comment On November 19, 2013, at 11:59 AM, Mattenth wrote:

    Wow, this article is flat out wrong. The new consoles are NOT backwards compatible.

  • Report this Comment On November 19, 2013, at 1:35 PM, shanse wrote:

    Apparently this article is from the future, since it's telling me that the stock price will double in 2015 and it's only 2013, so maybe both Sony and Microsoft will upgrade their consoles to make them backward compatible in 2014. :-)

  • Report this Comment On November 19, 2013, at 2:50 PM, Mattenth wrote:

    If only it were that easy. They won't be backwards compatible in 2014 due to different architecture. Fundamentally, you can't get those old discs to run on the new consoles.

    However, you could use cloud computing, which is what Sony intends to do with Gaikai and Microsoft is hinting at with its own cloud. It'd be like Netflix for games, but that would absolutely decimate GameStop.

    Regardless, point is...

    The new consoles are NOT backwards compatible with old discs, and never will be.

  • Report this Comment On November 19, 2013, at 3:50 PM, Stockman1114 wrote:

    GameStop is a dinosaur. Smartphones and Ipads are the future of gaming. Downloadable games will drive Gamestop to it's death.

  • Report this Comment On November 19, 2013, at 4:41 PM, Stockman1114 wrote:

    The other major problem with GameStop is it's CEO, Julian Raines. Mr. Raines has the wrong background to be leading Gamestop at this point.. He worked for Home Depot and LL Bean, before arriving at GME.. This company needs a young visionary leader, not an old guy with arcane 20th century ideas. GME needs someone like Gregg Peters of NetFlix. Mr Peters established Netflix as a major player in the movie streaming business. GameStop doesn't have much time, before it goes the way of other companies that couldn't or wouldn't adapt - BlockBuster Video or Hollywood Video.

  • Report this Comment On November 20, 2013, at 11:04 AM, TMFGalagan wrote:

    @Mattenth - Thanks for letting me know that my source was incorrect. My apologies for the error; it will be corrected soon.

    best,

    dan (TMF Galagan)

  • Report this Comment On November 20, 2013, at 2:24 PM, Rimpynths wrote:

    This article used to say...

    "Perhaps the best news for GameStop, though, is that both Sony's and Microsoft's new consoles will be backward-compatible. That opens the door to gamers buying up titles made for their respective predecessor consoles, which is exactly the market that GameStop is best positioned to profit from."

    ...which was totally wrong and has since been corrected. The author used the wrong premise to value this stock and once he found out that his premise was wrong, did he reassess his conclusion? Nope, he just changed his premise! What a lazy, careless way to analyze a stock.

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