OK, I'm a little slow on the uptake -- let me make sure I've got this straight.

Thanks to superb sales of software titles like Electronic Arts' (Nasdaq: ERTS) Super Mario Galaxy and Activision's (Nasdaq: ATVI) Guitar Hero, coupled with sold-out inventories of the Nintendo DS and Sony (NYSE: SNE) PSP handheld consoles, and "strong" sales of the Wii, PlayStation 3, and Microsoft (Nasdaq: MSFT) Xbox360, GameStop (NYSE: GME) announced yesterday that it had its best holiday sales season ever, including 20% same-store sales growth for the season and 35% total sales growth.

And it raised guidance for the quarter:

  • Roughly doubling its comps expectations
  • Upping its profits per share range by $0.13
  • Predicting that it will earn $1.75 or $1.76 per share for the year

But after all this, shares declined more than 5% yesterday and are falling again today. Man, I've heard of "selling on the news," but this is over the top, don't you think?

Or maybe it isn't
There is a method to the madness of selling on good news. When a stock runs up in anticipation of strong earnings -- as GameStop undeniably has, with its shares up 80% in value over the last 52 weeks -- investors who've gambled correctly and want to cash in their chips need to decide on the most opportune time to do so. The good news supports the stock price during the cash-out.

Foolish takeaway
What's more, it seems to this Fool that it's the right call to make. Reviewing GameStop's valuation today, in the wake of the first wave of selling, I find little to like even at this lower price. The stock sells for 37 times trailing earnings, and 33 times trailing free cash flow (my preferred metric). Weighed against profit growth that most analysts think will average 20% per year over the next half-decade, GameStop still looks expensive to me.

The wild card in this great cashing-in: GameStop has beaten analyst expectations in the last four quarters. But to justify even today's lower stock price, it's going to need to keep on doing that -- and in a big way.

What did we expect out of GameStop last quarter, and what did we get when it booted up? Find out in:

Activision, Nintendo, GameStop, and Electronic Arts are Stock Advisor picks. Microsoft is an Inside Value selection. You can try either service free for 30 days.

Fool contributor Rich Smith does not own shares in any company named above. Why do we tell you this? Because The Motley Fool has a disclosure policy.