The next few months will make for the biggest holiday season that the video game industry has ever seen, with more than two dozen major titles set to launch this fall. Activision Blizzard (NASDAQ:ATVI) kicks things off in September with Destiny, the most ambitious release of a new intellectual property yet. But that's just the beginning.
The October schedule is jam-packed with likely blockbusters, including Nintendo's Super Smash Bros and new entries in the Skylanders and Borderlands franchises. After that, gamers will be treated to an epic November that includes, among many other AAA titles, the first Call of Duty to enjoy a three-year development cycle and the next-gen version of Take-Two Interactive's (NASDAQ:TTWO) Grand Theft Auto V.
While the rest of the retailing world struggles to find sales growth this Christmas, the video game market clearly has the wind at its back. So does that mean it's time to buy GameStop (NYSE:GME), the dominant leader in the category? Read on to find out.
It's all about the buy-sell-trade
Gaming is an expensive hobby. New releases retail at $60 -- without extra digital content, which means that a gamer who wants a few of the above titles is looking at a price tag that stretches into the hundreds. That's where GameStop's buy-sell-trade model comes into play. The company uses trade-in promotions to lower the effective price for games, which gives it a huge advantage over other retailers like Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT).
For example, GameStop at launch was selling Ubisoft's Watchdogs for 10 euros to customers in Europe who traded in two of their own games. In the United States, the Watchdogs launch sale took advantage of GameStop's growing consumer electronics business to offer $25 off of the title for gamers that also purchased a pre-owned smartphone.
Promotions like these have kept GameStop at the top of the video game retailing world. The company's share of all next-gen titles sold is just above 50%, which is actually a better result than GameStop managed in the prior generation. That retail dominance is a big reason why the company is posting record growth right now.
Branching out from games
Still, the video game business is cyclical, which means that the downs can be as painful as the ups are fun. In fact, GameStop had to suffer through two straight years of shrinking sales at the end of the prior generation of gaming consoles. After posting a brutal 8% comparable-store sales decline for the year, company CEO J. Paul Raines opened his Q4 earnings call with these words: "I am pleased to announce that 2012 is officially over."
The good news for investors is that the company is diversifying its business lines to avoid a repeat of those dark days. It added consumer electronics, including tablets and smartphones, to its stores, slipping those products right in to its buy-sell-trade model. GameStop is also now a big player in wireless services, and is one of the largest AT&T wireless dealers thanks to its Cricket and Spring Mobile stores.
Together, these new businesses only accounted for about 7% of GameStop's revenue last quarter. But that figure was 4% a year ago, and should only climb higher in the years ahead.
The case for buying
So should investors buy GameStop stock now? Shares are valued at 13 times last year's earnings and roughly 10 times the $4.40 it should earn next year, according to consensus estimates. That looks like a bargain to me, especially considering that GameStop is the leader in its core market and has a number of promising secondary businesses.
But this holiday season will be another key test of GameStop's strength. In a fight for customer traffic, every major retailer will be heavily promoting its video game products. Still, GameStop is positioned to win most of that business on its way to posting strong sales and profit growth for the year.
Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool recommends Activision Blizzard and Take-Two Interactive. The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.