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Why GameStop Stock Popped 13% Thursday

By Rich Smith – Oct 15, 2020 at 4:51PM

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GameStop's deal with Microsoft could be as great as it initially seemed.

What happened

Shares of video-games retailer GameStop (GME -9.85%) scored big last week when a partnership announced with Microsoft (MSFT 4.14%) sent the shares flying 44% in a single day of frenzied trading. Investor enthusiasm soon waned, however, as critics began chiming in, complaining that "the substance in the press release was hollow" and that it appeared Microsoft was "taking advantage of GameStop's desperation, forcing them to share in subscription sales as their core market evaporates," reported last week.

This negative sentiment reversed on Thursday, however, in the wake of positive commentary on the deal from Wisconsin's Domo Capital Management, driving GameStop stock up 12.9% in Thursday trading.

Stock up glowing green arrow climbs on a stock screen.

Image source: Getty Images.

So what

What exactly did Domo have to say? Citing a conversation this investment company had with GameStop management directly, Domo tweeted -- apparently on Tuesday, but the news is just filtering out today -- that GameStop's agreement with Microsoft will in fact see the software giant share revenue with the video-games retailer "on all ... digital downloads and digital content ... from any device that GameStop brings into the @Xbox ecosystem."

Thus, says Domo, "GameStop now meaningfully participates in digital" -- a boost to its revenue stream.

Now what

Now admittedly, GameStop has yet to publicly confirm that this is the case. And even if it is the case, it's unknown at present how much additional revenue we might be talking about or what profit margins GameStop might enjoy on digital revenues it generates from Microsoft sales.

Still, the prospect that this news will reverse GameStop's streak of five straight years of declining sales seems to be enough to have investors hoping today that GameStop can grow again.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool recommends GameStop and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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