How Long Can GameStop Surf This Wave?

Sales estimates for video games jumped yesterday, pushing GameStop's stock to the next level.

Jun 18, 2014 at 7:00PM

When video game sales are up, GameStop (NYSE:GME) is up, and it turns out that video game sales are up right now. Recent reports from the NPD and new releases showcased at E3 have brought a whole bucket of good news back from the well, and GameStop is drinking it up. It's a blip on the radar, though, and GameStop is still struggling to find its way in a changing environment. Does the good news indicate good things in the long run, or is GameStop just riding a short-term trend?

Video game sales spike
Market research group NPD reported that sales of video games in May rose 51% over the same period last year. Gamers were buying new consoles from Microsoft and Sony, but their spending on the games associated with those consoles wasn't rising fast enough. That was pushing year-over-year comparisons down and leaving companies like GameStop waiting for more. Luckily, more has come.

In May, new games helped fill the hole that had been forming under the retailer. Nintendo, for instance, said that with the launch of Mario Kart 8, Wii U consoles sales spiked, bringing in new gamers. On top of that release, the Wii U has seen plenty of new interest from the unveiling of the new Zelda game, due out next year. 

PlayStation and Xbox game sales got a big boost from Ubisoft's Watch Dogs, released at the very end of May. Even with only a few days of sales, Watch Dogs topped the NPD chart. These sorts of games are the things that drive GameStop's top line. As more people buy new games, they find themselves with used games to sell back to GameStop later in the year.

In its last conference call, GameStop called out Watch Dogs as a sales driver and anticipated more titles coming out of this year's E3. Those were both true, and the reason behind GameStop's recent run. The stock is up about 5% over the last week -- though it's down 20% year to date.

What is GameStop?
There are two ways to look at GameStop. The narrowly defined version is a business that sells video games but that needs used games in order to thrive. This is bad news in the long run for GameStop, as the video game model shifts -- much of it already has -- to digital gaming. Digital games already accounted for about half of the $1.5 billion spent on games in May, according to NPD. 

The broader definition, the one that I'm inclined to believe even if it's brought me nothing but heartache, is that GameStop is a video game seller, and it can thrive even if games shift completely into digital. GameStop is already working to grow its digital business, but it still has a long way to go. Good months like this May can keep spirits up in the short term, but something still needs to change to make GameStop a long-term winner.

Video games aren't the only entertainment changing
The shift from physical to digital isn't just happening in the world of video games. You know cable's going away. But how do you profit from that knowledge? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Andrew Marder 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.

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