The Latest Price Targets Don't Imply Big Upside, But GameStop Stock Holds Value

  • The shift toward next generation consoles, should put GameStop in the driver's seat.
  • GameStop's expansion into the Loot (collectibles) business is a natural extension of its core competency, and should diversify its revenue stream.
  • GameStop's Spring Mobile is now AT&T's largest reseller, and the move to mobile should give the company a more stable revenue base.
Latest Price Targets Don't Imply Big Upside, But GameStop Stock Holds Value

Certain companies refuse to be defined by their critics. It seems like every time an analyst says that GameStop (NYSE: GME) will be killed off by a new competitor, the company proves them wrong. With shares up more than 20% this year, skittish investors might wonder if it’s time to take some money off the table. More so with analysts updating their price targets on the GameStop stock such that there might not be much more upside expected. However, apart from strong fundamentals and strong earnings trajectory there are three solid reasons to believe this year’s price increase is the beginning of a longer-term move upward.

GameStop Is Shifting Into High Gear

The first reason why it looks like GameStop is just getting started, has to do with the industry shift toward next generation consoles. Gamers are moving up to the XBox One and PS4, with almost startling speed. In theory, this is good news for electronics retailers like Best Buy (NYSE: BBY), and gaming companies like Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: EA).

GameStop and Best Buy seem to be getting a lift from this move in the gaming industry. Best Buy’s U.S. consumer electronics business witnessed a more than 7% annual increase in same-store sales in the most recent quarter. That being said, GameStop’s CFO Robert Lloyd said that the company sold, “42% more next-gen consoles than in the second quarter of 2014 (in the U.S.).”

It’s likely that game publishers will continue to drive increased adoption of the new systems with targeted software offerings. For instance, Activision Blizzard’s highly anticipated 'Call of Duty: Black Ops III' is available for both next-gen and prior-gen consoles. However, customers that pre-order will get a special map that is only available to next-gen console owners.

In an even more direct move, Electronic Arts’ Star Wars Battlefront game will only be available for PC, XBox One, and PS4. This title seems to have “biggest game of the year” written all over it. The fact that prior-gen console owners won’t have access to it, could drive further upgrades.

With a strong adoption rate of next-gen consoles, GameStop now has four big hardware systems (XBox One and XBox 360, PS3 and PS4), supporting its huge previously owned software business. The upgrade of consoles creates a virtuous cycle for GameStop. The more next-gen consoles are sold, the more next-gen games are sold. The more next-gen games are sold, the more are available to be traded in.

GameStop Customers Want Loot

GameStop is trying to redefine the word “Loot” to mean collectibles. While GameStop has always carried a few collectibles in its stores, the company is getting serious about this business. In fact, the company’s EVP of GameStop International, Michael Mauler, said, “we expect this category to grow to an over $500 million business globally over the next three years.”

Loot is to GameStop, what services are to Best Buy, or digital content is to Activision or EA. Each of these companies have a plan to diversify their revenue stream. Best Buy would love for the Geek Squad to generate strong revenue growth. Activision and EA are seeing strong growth in digital receipts and recurrent purchases. In the same way, GameStop wants to extend its gaming knowledge into the collectibles industry.

The company purchased Geeknet (the company behind thinkgeek.com), which carries high margin collectibles around genres like Star Wars, Star Trek, Marvel, and more. With the resurgence of popularity of these brands from new movies and toys, “geeky” collectors are interested in adding to their collections as well.

GameStop’s collectibles business is growing fast, as last quarter sales increased by more than 48% year-over-year excluding currency. In addition, the company said in its recent survey, “67% of GameStop customers indicated they plan to purchase collectibles in the next 12 months.” In the end, GameStop may end up being the company to go to for both games and collectibles for so called geeks worldwide.

Borrowing A Page From Best Buy’s Playbook

In the last few years, Best Buy has been shifting its focus toward its mobile business. In fact, 46% of the company’s domestic business comes from the Computing & Mobile division. With the growth of high-end smartphones, and customer’s seemingly insatiable appetite to upgrade, it’s hard to ignore the profit potential.

GameStop has gotten more serious about grabbing a piece of the mobile revolution, and its Technology Brands division is another cog in the company’s growth machine. The company’s Mobile & Electronics business grew revenue by 28% year-over-year ex. currency last quarter. The company acquired or opened more than 180 new stores, and its Spring Mobile branded stores are now AT&T’s largest reseller.

Final Thoughts

GameStop is seen as a trusted resource for trade-ins and pre-owned games. With the industry moving toward next-gen consoles, and a strong holiday lineup of new releases, the company seems positioned to benefit in its pre-owned, new hardware, and new software businesses. The natural extension of Loot (collectibles) in both GameStop stores, and on thinkgeek.com, should give the company better opportunities to cross-sell games to Loot buyers and vice versa.

While GameStop reaps the benefits of increased gaming and Loot revenue, it is also diversifying itself into a leading mobile retailer as well. Long-term investors have been given the roadmap for GameStop’s future. What was once seen as a brick-and-mortar game store, is turning into, “a global family of specialty retail brands.”

The latest target price update by analysts implies a limited upside for GameStop stock, however, with shares selling for roughly 11 times projected earnings, and analysts calling for 12% annual growth in earnings for the next few years, the stock already seems appealing. When we add the stock’s over 3% yield to the mix, it looks like GameStop is a solid value. Long-term investors should stop and check out this company, as it is done playing games and seems ready to run higher.

Disclosure: Chad Henage has no position in any of the companies mentioned in this article, and no plans to initiate any positions in the next 72 hours.

Cover image source: Flickr

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
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  • I do not have any business relationship with the companies mentioned in this post.
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