GameStop is similarly despised in the investing community today. Analysts still know that the future belongs to digital downloads, and they see margin erosion from competition in the used-game market from retailers such as Wal-Mart
But I liked Netflix in 2007 because the management team was financially prudent, aware of the threats, and patiently evolving the company's strategic response. Netflix's financials showed healthy cash-flow metrics that were usually better than reported net income. Moreover, management was looking to the future and experimenting with instant viewing. Do you remember how clunky those first viewers were, with stuttering video and frequent crashes? But each iteration got better, and customer usage was steadily climbing.
GameStop's management today is demonstrating a similarly prudent execution plan. The company's financials are excellent -- free cash flow exceeded net income by 21% in 2009 and is on the same track for 2010. Management is incrementally improving digital downloads, which grew by 9.9% in the most recent quarter.
"We continue to be the fastest-growing website in the gaming space as we became the No. 2 largest online game retailer behind Amazon
In addition, the company is leveraging its physical locations with its PickUp@Store program to provide immediate gratification for customers who like to browse before buying.
Moreover, GameStop has several immediate catalysts that make me bullish about the stock. Demand for Microsoft's
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