At least one Wall Street pro is pumped about GameStop's (NYSE:GME) near-term prospects. Piper Jaffray bumped its price target on the chain of more than 6,000 video game stores from $52 to $56.
Analyst Michael Olson feels that software sales should start to pick up with the PS4 and Xbox One gaining traction since the next-generation consoles hit the market during the 2013 holiday shopping season.
Piper Jaffray had gone full circle on the stock since late last year.
- Olson lowered his price target from $52 to $51 back in December.
- GameStop's price goal was slashed even deeper -- from $51 to $47 -- in March following a lousy holiday quarter.
- With optimism percolating earlier this summer, Piper Jaffray's price target was bumped all the way back to $52 last month.
Olson compares the gaming cycle now to where we were just before the industry experienced a renaissance eight years ago. It's a noble thesis, but it's not fair to compare the gaming revival that was sparked by the game-changing Wii debut in late 2006 to what's going on now. Wii raised the bar with its motion-based controller in a revolutionary way. The Xbox One and PS4 are great platforms, but we're looking at evolutionary steps here.
It was also a different climate for GameStop in 2007. Back then "mobile" gaming meant a Nintendo DS and "digital" delivery meant having a website to promote traffic to your physical stores. We live in a new world where casual gamers are just fine on their smartphones and tablets, leaving consoles to diehard gamers or those that use the systems primarily as a set-top device to stream Hulu and HBO. We also live in a time when software publishers and distributors are reaching out directly to gamers through download marketplaces operated by the console makers, cutting out the retail middleman.
There's obviously still a market for games on discs. Gamers need hardware and accessories. There are still games and gear being swapped for store credit. However, suggesting that a bricks-and-mortar chain can be as relevant in 2016 as it was in 2008 doesn't pass the sniff test.
GameStop has made the most of a bad situation. It has the right model -- low overhead and high margins on trade-ins -- to stick around for at least a few more years. It's generating a ton of cash, and it's been using that to diversify into new markets. It finalized its acquisition of Geeknet last month. It has also returned some of that dough to shareholders through generous payouts. It has hiked its dividend four times in three years, currently generating a healthy yield of 3.2%.
However, the biggest use of its healthy cash flow situation over the years has been to eat its own cooking. Buying back shares has helped mask its fundamental stall in profitability. Net earnings hit an all-time high of $408 million in fiscal 2010, according to S&P Capital IQ data. Trailing profitability is just below that now, but we've seen earnings per share grow from $2.56 a share in 2010 on 154 million shares outstanding to $3.61 a share on a weighted average of 110.4 million shares.
Buying back stock and boosting its distributions finds GameStop doing right by its shareholders, but it's still hard to get excited about the direction of its business in the long run. GameStop can't go back in time. No company can.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.