As an impartial play on gaming growth, GameStop (NYSE:GME) seems likely to prosper, regardless of whether Electronic Arts (NASDAQ:ERTS) or Activision (NASDAQ:ATVI) holds the top score in game-making. Indeed, all last year, GameStop fragged every quarterly earnings hurdle in its path. Tomorrow morning, the world's preeminent gaming retailer heads into the next level with Q1 2008 earnings news. Will it continue to "pwn" the market?

What analysts say:

  • Buy, sell, or waffle? Sixteen analysts still play GameStop, which garners 11 buy ratings, four holds, and a sell.
  • Revenue. On average, analysts expect to see sales rise 34% to $1.72 billion.
  • Earnings. Profits could nearly double to $0.35 per share.

What management says:
"Interesting" developments at GameStop of late. In April, two key execs decided to exit, stage left. First to log off was Executive Vice President of Distribution Ronald Freeman, who resigned on April 14. He was soon followed out the door by company President Steven Morgan, who resigned May 2 -- but not before collecting a nearly million-dollar settlement encompassing "Mr. Morgan's current annual salary, average annual bonus for the past three years, unpaid vacation pay and value of six months of medical benefits, plus interest thereon at 5% per annum from the Effective Date through November 3, 2008," plus immediate vesting of stock options.

What management does:
 A million bucks? Really? That seems like a sweet retirement package, but a Fool can still wonder whether Morgan got while the getting was good -- in a bad way. See, things are still going very good at GameStop. The retailer reported yet another earnings beat last quarter, closing out a year of 33% sales growth and a stunning 82% increase in profits.

Gross margins are still sliding, but the company continues to lead more diversified gaming retailers like Amazon.com (NASDAQ:AMZN), Best Buy (NYSE:BBY), Circuit City (NYSE:CC), and Wal-Mart (NYSE:WMT) in the margin race. What's more, whatever GameStop loses in gross margin, it's "making up on volume" as it grabs market share. Operating and net margins just keep on growing.

Margins

7/06

10/06

2/07

5/07

8/07

11/07

Gross

29.0%

27.7%

27.3%

26.6%

25.8%

25.6%

Operating

5.8%

6.4%

6.5%

6.5%

6.6%

7.1%

Net

2.4%

3.0%

3.1%

3.2%

3.5%

4.1%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Last quarter, after praising GameStop's GAAP numbers, I observed that the company had failed to provide us a cash flow statement against which to check the quality of those GAAP earnings, and promised to update you on the cash-profits picture once that document came out. Well, it's obviously out by now, and here's the skinny.

GameStop generated $327.1 million in free cash flow cash last year. Thus, while the stock looks a mite pricey at 29 times trailing earnings, GameStop appears more reasonably priced when you view it as trading for just 25 times its cash profits.

With annual growth expected to average 20% or so over the next five years, GameStop may not be an obvious bargain. But considering how quickly its profits are expanding, and how often it proves the Street's growth expectations overly conservative, it just might offer an Easter Egg for investors willing to dig deeper than the GAAP statistics.

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