GameStop, I'm Not Impressed

GameStop sells a ton of hardware, but not a lot of software.

Jan 14, 2014 at 12:15PM

GameStop (NYSE:GME) investors are getting a glimpse of the future of the leading video game retailer, and it's not pretty. 

GameStop shares opened 15% lower today after it announced disappointing results for the critical holiday shopping season. The top line isn't scary. Global sales climbed 9.3% to $3.15 billion for the nine weeks through Jan. 4, fueled by a 7.1% increase in domestic comps and an impressive 17.4% spike in comps for its international locations. 

However, as you can probably imagine, the growth here was entirely the handiwork of Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) putting out new consoles in November. New hardware sales nearly doubled as folks snapped up $500 Xbox One and $400 PlayStation 4 systems. 

That's pretty much where the good news ends. New software sales plunged by 22.5%. This was worse than GameStop projected, but any gamer could've seen this coming. Microsoft's Xbox One and Sony's PS4 are not compatible with game discs from earlier generations. Owners of Xbox One and PS3 consoles aren't going to be making big investments in software if they plan to upgrade later.

There's also the very nature of the Xbox One and PS4. Yes, they play games on discs, but they are also high-end TV-viewing set-top boxes. They feed into each company's digital marketplace where GameStop's once-potent niche of selling software is less relevant, given the vibrant ecosystems that Microsoft and Sony have established. 

This is the worst possible scenario for GameStop investors, because hardware is a low-margin category. GameStop has its biggest markups on software and pre-owned games and gear. If folks are walking into GameStop just to buy a next-generation console, they won't be buying too many physical games -- much less trading them in for store credit -- in the future. 

GameStop did experience a 7% increase in pre-owned sales, but that was mostly the older consoles that are now that much cheaper since they were traded in by early adopters saving up for the new Microsoft and Sony platforms. It wouldn't be a surprise to see pre-owned sales start to slip after this, just as it wouldn't be a surprise if new software sales don't bounce back as the digital migration takes over.

The end result of better-than-expected hardware sales and weaker-than-expected software sales is that the bottom line is going to take a hit. GameStop now sees a profit of $1.85 to $1.95 a share for the quarter, well short of the $1.97-to-$2.14-a-share range that it was forecasting less than two months ago.

GameStop shares nearly doubled in 2013 as investors warmed up to the potential of the Xbox One and PS4. Well, they're here, and now we're seeing holiday profits falling well below the $2.16 a share it rang up a year earlier.

The game isn't over for GameStop. It's still very profitable, and it's in fine financial condition. However, expect the naysayers who wrongly argued that the chain had peaked two years ago to begin getting vocal again. This time, they may be right.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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