There is no letup in sight for video-game demand during the coronavirus pandemic. The console upgrade cycle hasn't even kicked in yet, and combined sales of video game hardware, software, and accessories are breaking all kinds of records.

Although the market seems to have all but written off GameStop (GME 1.07%) after a worse-than-expected earnings performance last month, perhaps investors shouldn't eulogize the video game retailer just yet. Its revival might be riding this wave of industry growth, which will only accelerate when the new game consoles are released.

Four males playing video games

Image source: Getty Images.

The rising tide lifting GameStop's boat

Market researcher NPD Group recently said there was a tsunami of spending across the video game industry in June, hitting levels for the month that haven't been seen in over a decade.

According to NPD's industry analyst Mat Piscatella, sales of video game hardware, software, accessories, and game cards surged to $1.2 billion for the month, a 26% increase from last year and the most recorded for June since 2009.

Year-to-date spending hit $6.6 billion, the most since 2010, when $7 billion was spent.

This is remarkable for a number of reasons, not least because it is just a few months away from Microsoft (MSFT -1.27%) and Sony (SONY -0.71%) releasing their latest Xbox and PlayStation game consoles, respectively.

GameStop's slump is partly due to video game players holding off on buying new games and equipment as they await the latest consoles. There's little sense in buying software that won't be compatible, yet the lockdown due to COVID-19 has apparently turned all that upside down.

A few key pieces fell into place

Piscatella says that while hardware spending fell 17% in June to $191 million versus last year (not surprising because of the new consoles coming), dollar sales of the game titles it tracks grew 49% to $570 million compared to last year, the highest total for June since the $598 million reached in 2010. 

Still, year-to-date hardware sales are up 25% while software is 19% higher. Both can probably be attributable to the same factor: the Nintendo (NTDOY -1.16%) Switch hybrid portable game console, which became the must-have hardware item during the pandemic because of its hugely popular Animal Crossing: New Horizons game.

Demand was so hot for the $300 Switch console that shortages developed. That led gamers to buy up the Switch Lite, which retails for $200 and differs from the full version primarily by not being able to connect to a TV. There are now shortages of that model, too.

And on June 19, Sony and Naughty Dog released Last of Us Part II for the PlayStation 4, the much-anticipated follow-up to the original first-person zombie shooter of the same name. NPD says it debuted in the No. 1 spot and was already No. 3 on the year's best-seller list after just one month on the market.

GameStop is ready for the future

There were other industry superlatives in NPD Group's data, and that's why GameStop investors should have a lot of hope that the retailer will surprise the market when it reports earnings in September.

Although GameStop's latest financials disappointed Wall Street, it was able to transform itself into a go-to destination during the pandemic by using its e-commerce platform. While physical games and hardware are expected to dwindle over time as more game play migrates online and to digital downloads, GameStop may have found a way to extend its own expiration date well out into the future.

It reported e-commerce sales grew 519% in the first quarter, and were up over 1,000% during the six weeks its stores were forced to close, tracking closely to Earnest Research estimates showing online sales through the video game retailer's website soared 1,500% as the pandemic began.

A disproportionate discount

The likelihood that GameStop is continuing to do brisk business now that its stores have reopened is high, which means the deeply discounted valuation the market is assigning the retailer's stock is way out of whack with reality.

GameStop trades for a ridiculous 0.5% of its sales, a fraction of its book value and cash on hand, and a miserly two times the free cash flow it produces. Not only is it likely riding the wave of pandemic growth, but the console upgrade cycle also will kick into gear almost immediately after it posts its next earnings report.

There were valid questions early on about whether GameStop could make it to this point, but the video game retailer's business is in surprisingly better shape than suspected, and there are numerous levers for growth that investors will see it pull in the near future.