3 Reasons GameStop's Stock Could Rise

After doubling in 2013, GameStop (NYSE: GME  ) stock hasn't performed well so far this year. Shares are down almost 20% since January, although they have recovered slightly over the last few months.

GME Total Return Price Chart

GME Total Return Price data by YCharts.

With the video game retailer set to announce quarterly earnings on Thursday, now is a good time to consider the catalysts that might send the stock higher in the months and years ahead. 

Beating those high expectations

The most immediate of these is GameStop's potential for beating expectations later this week. That won't be easy given the high hopes embedded in those targets: Wall Street is looking for a 100% profit bounce and a 20% spike in revenue. Those figures would trounce last quarter's 25% and 7% improvements in profit and sales, respectively. 

Still, there are two good reasons to believe GameStop's business accelerated this past quarter. First, hardware sales were sure to see another lift from the next-gen console rollout. Sony's (NYSE: SNE  ) PS4 device continues to sell at a healthy pace, and even Microsoft's (NASDAQ: MSFT  ) less popular Xbox One probably saw a boost after a price cut early in the quarter. Together, the next-gen consoles have been tracking at twice their sales pace from the prior generation, and there's no reason to think that trend reversed this quarter.

Second, and more important for GameStop, new AAA titles including The Last of Us and Watch Dogs likely boosted software sales and kept customer traffic humming at its stores, which is why the retailer should post a comparable-store sales jump of as much as 19% over the prior year.  

Expanding into new business lines

Progress in GameStop's efforts to diversify into new product lines could also send the stock higher over time. Those products include wireless services and consumer electronics, which management has identified as key growth areas for the company. GameStop posted big sales gains in both categories last quarter thanks to contributions from newly acquired Spring Mobile and Simply Mac stores. 

With those gains, the results so far suggest that GameStop can profitably extend its buy-sell-trade business model into these growing categories. That's important because digital sales threaten to eat away at its traditional retailing business over time. After all, game publishers like Activision Blizzard (NASDAQ: ATVI  ) and Electronic Arts (NASDAQ: EA  ) are logging record-high levels of digital receipts these days, increasingly cutting retailers out of the sales process. 

Booking a sustained increase in profitability

But the strongest case for GameStop's stock rising over time involves a sustained increase in profitability. Investors have already seen a taste of that success: Gross profit margin has been climbing consistently since 2008, recently touching a first-quarter record of 30%. 

GME Gross Profit Margin (TTM) Chart

GME Gross Profit Margin (TTM) data by YCharts.

Whether GameStop can hold on to those gains depends a lot on pre-owned video game sales. Those carry the highest profit margin, by far, of any product that GameStop sells. And the good news is that pre-owned software is sure to move higher as a percentage of sales in the years ahead as the next-gen consoles age. 

Foolish final thoughts

GameStop has recently made two major tweaks to its pre-owned video game business: Introducing more value-priced offerings and revamping its pricing structure for trade-ins. The first move is likely to boost GameStop's profit margin on trade-ins to a new high that approaches 50%. It's still early to tell what the second pricing change might do for its business. However, investors betting on the stock over the long term have to believe GameStop can keep its dominant grip on the video game market and protect its industry-leading profitability, all while successfully growing into new business lines. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (0) | Recommend This Article (2)

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.

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: 3074267, ~/Articles/ArticleHandler.aspx, 12/20/2014 11:49:49 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 13 hours ago Sponsored by:
DOW 17,804.80 26.65 0.15%
S&P 500 2,070.65 9.42 0.46%
NASD 4,765.38 16.98 0.36%

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

12/19/2014 4:07 PM
GME $34.50 Up +1.40 +4.23%
GameStop CAPS Rating: *
AAPL $111.78 Down -0.87 -0.77%
Apple CAPS Rating: ****
ATVI $20.25 Up +0.21 +1.05%
Activision Blizzar… CAPS Rating: *****
EA $47.46 Up +0.22 +0.46%
Electronic Arts CAPS Rating: **
MSFT $47.66 Up +0.14 +0.29%
Microsoft CAPS Rating: ***
SNE $20.58 Down -0.56 -2.65%
Sony Corp (ADR) CAPS Rating: **

Advertisement