Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



5 Reasons Why GameStop Is Underappreciated

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

It might be hard for some to believe, but apparently there is still loyalty in the gaming industry after all. There have been many articles written over the last couple of years about the demise of the traditional gaming business, and seemingly in connection GameStop (NYSE: GME  ) was presumed to fail as well. However, if the company's current quarter proves anything, it is that gamers are loyal and that price isn't always their number one concern.

Price is important, but trust is earned
In the retail industry, some believe that the company offering the lowest price will always win. There's little doubt that (NASDAQ: AMZN  ) is well-known for its low prices, and both GameStop and Best Buy (NYSE: BBY  ) have been forced to face the realization that price matters.

The difference between GameStop and Best Buy's strategies is that Best Buy has determined that price matching Amazon and others is the best way to bring customers back into the store. GameStop, on the other hand, is willing to rely on its loyalty program as well as the knowledge of its sales staff to keep gamers coming back.

The first reason that GameStop is underappreciated is that when a gamer walks into GameStop, they know that the employees are well-versed in the intricacies of both new and old games. If they walk into Best Buy, however, games are simply part of what the store sells and not its primary business. This is a key difference between GameStop and Amazon as well, as online sales rarely lends the customer any expertise on what they are purchasing.

This is anything but soft
GameStop's revenue percentages vary dramatically depending on what's going on in the current quarter. In the last three months, more than 50% of the company's revenue was derived from new videogame sales. With a better than 43% increase in this type of revenue due in large part to new hit releases like Grand Theft Auto V, the company's overall revenue increased by an impressive almost 19%.

You could easily make the argument that if GameStop consistently had strong new releases to rely on then investors could compare the company to Amazon when it comes to sales growth. For a point of comparison, Amazon reported total sales improved by 24%, but cost growth led to a net loss. Best Buy's results have been improving, but in the last three months the company's overall revenue still declined by 0.2%. With GameStop's earnings per share increasing by greater than 52%, the company's results speak for themselves.

The second reason that GameStop is underappreciated is that GameStop should continue to benefit from the strength of new titles moving into the holiday season. With releases like Madden 25, Call of Duty: Ghosts, Battlefield 4, and more, gamers are going to be out in force. Since many gamers know that they can trade old games at GameStop and get advice from experienced salespeople, the company should continue to see strong sales growth from new software.

Hard to compare
The third reason that GameStop appears underappreciated is that gamers have been waiting seven to eight years for the newest versions of the Xbox and PlayStation consoles. Prior to these huge releases, GameStop reported better than 15% growth in new hardware sales.

This strong performance was due to sales of Nintendo's 2DS and 3DS handhelds. Considering that these systems carry much lower prices than the Xbox One and PlayStation 4, it's not a stretch to believe that GameStop could be in for several strong quarters of sales. Customers can certainly buy these systems from Amazon, Wal-Mart, and many other retailers, but GameStop offers rewards and trade-in value as added incentives. Furthermore, because the systems are new, price competition won't be as fierce.

Two more reasons to buy
The last two reasons that GameStop appears underappreciated are the company's yield and its expected growth over the next few years. With a yield of about 2.3%, investors are getting a better-than-CD yield while waiting for the company to benefit from new hardware and software sales.

Though Best Buy pays a yield of less than 2%, Amazon doesn't pay a yield at all. In addition, analysts expect this strong hardware and software cycle to allow GameStop to grow its EPS by more than 15% annually over the next five years. Though Amazon is expected to grow its earnings by over 36%, the company's stock is priced for perfection at more than 130 times next year's projections.

Considering that GameStop sells for just 12 times its 2014 projections, investors seem to be getting a good value. With a clearly loyal customer base and the strength of both hardware and software releases, GameStop looks poised to grow revenue and earnings significantly over the next year or more. Investors should stop their search for the next stock to add to their portfolio; after all, investing is no game.

Tired of watching your stocks creep up year after year at a glacial pace?
Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, WITH YOU! It's a special 100% FREE report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio.

Read/Post Comments (0) | Recommend This Article (1)

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: 2756237, ~/Articles/ArticleHandler.aspx, 9/26/2016 3:29:29 AM

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 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

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

9/23/2016 4:02 PM
BBY $37.99 Down -0.48 -1.25%
Best Buy CAPS Rating: *
GME $28.19 Down -0.08 -0.28%
GameStop CAPS Rating: **