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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Fool contributor Tomasz Johannsen owns shares of GameStop, Activision, Microsoft, and Wal-Mart. Microsoft and Wal-Mart are Motley Fool Inside Value picks. Amazon.com, Activision Blizzard, and Netflix are Motley Fool Stock Advisor choices. Wal-Mart is a Motley Fool Global Gains selection. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. Motley Fool Options has recommended writing covered calls on GameStop. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard, Microsoft, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.