GameStop (NYSE:GME) has been the center of many discussions lately, ranging from the ideologies of GameStop following in Blockbuster's footsteps to it failing due to an unsustainable business model. The company has had a history of following cyclical trends and patterns. As gaming companies release their consoles, GameStop booms; however, as consoles begin to mature and fade away so does GameStop. But with the holiday season upon us and the much-anticipated Xbox One and PlayStation 4 finally being released, is GameStop a good buy? The stock has leaped nearly 50% and is challenging 52-week highs, and many shareholders and analysts are relying on future growth and assumptions. For these reasons and many more I will outline below, there are positive catalysts ahead for GameStop's holiday quarter.
Recent Earnings Report and Fundamentals
GameStop's recent earnings report was phenomenal as international, or global, sales skyrocketed 18.8% and comparable sales rose 20.5%. Hardware sales performed very well, jumping 15.3% due to the strong sales of Nintendo products. Notable were the sales of the Nintendo 3DS and the Wii U. Sales of new software, or video games, also rose a whopping 43.1% after sales of popular game "Grand Theft Auto V" produced record results. This will happen again in the coming quarters as new games will be released, such as "Call of Duty: Ghosts" and "Halo 5."
GameStop's net earnings jumped 45.3% to a grand total of $68.6 million as revenue increased. The company now possesses $635.8 million in cash and equivalents. For the fourth, or current, quarter GameStop issued strong guidance. It expects store sales to increase between 2% and 9% and raised its full-year diluted earnings per share to $3.08 to $3.25. In terms of return on investment, GameStop offers a return of 2.4%, or $1.10 per share, which is above par when compared to other companies in its industry. Additionally, GameStop repurchased approximately 1.84 million shares at an average price of $51.37, or $94.4 million worth of stock. It also announced that it officially announced a $500 million share buyback. Recently, an analyst upgraded GameStop to buy from hold. Needham announced this upgrade on Nov. 22, 2013.
SEC Form 10-Q and Future Assumptions
GameStop itself has stated that a lot of its sales and sales growth relies on the future. The gaming company recently disclosed this information in its SEC Form 10-Q, stating that growth in the electronic game industry is usually driven by new technology. It also noted that gaming consoles are usually released in cyclical patterns; as there are technological developments in this space, more companies are willing to release consoles and gaming systems. Companies such as Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) are dependent on these consoles to drive their revenue up.
The last generation of consoles (the Sony PlayStation 3, the Microsoft Xbox 360, and the Nintendo Wii) was introduced between 2005 and 2007, while the Nintendo 3DS was introduced in March 2011 and the Sony PlayStation Vita was introduced in February 2012. If you go back to these points in time, you will see that GameStop experienced tremendous growth, as it has stated that it relies on these cyclical patterns of consoles being released. The most recent generation of consoles started to launch in November 2012, with the Wii U coming out and then followed by the Xbox One and the PlayStation 4 launching this November. What has happened in the past is that as video game consoles mature, the sales of complementary video games and accessories increase, which as a result generates higher gross margins. However, GameStop believes that the launch of the Sony PlayStation 4 and Microsoft Xbox One will most likely cut the overall gross margin percentage in the fourth quarter of fiscal 2013.
Even though many have turned to online retailers such as eBay (NASDAQ:EBAY) and Amazon (NASDAQ:AMZN) for hardware and software for their gaming needs, I strongly feel that GameStop still isn't dead. GameStop now possesses a very profitable gaming magazine subscription program and uses some of the data to help it determine what consumers want, which has really helped drive up profit margins. The last time Sony released its PlayStation 3 and Microsoft released the Xbox 360, record sales were happening in the gaming industry. This time around, consumers are showing more interest and I believe that GameStop's financial well-being will continue to get better. In Q3 2013, same-store sales rose 20.5%. Many rumors had been hyped up that specified these new consoles would not be compatible with older video games, but if this had been true, GameStop would have gone haywire. Fortunately, it wasn't -- both of the new consoles allow for used or older generation games to be played on the systems.
The other good news is that this quarter, top games have launched such as "Call of Duty: Ghost" and "Grand Theft Auto V." As an example, within the last three months alone more than 50% of the company's revenue has resulted from the sale of new video games. Because of these games, GameStop has been able to increase its revenue by about 19%.
Recently, a report surfaced stating that video game sales had risen 7% in November. Even better was the news that sales of hardware leaped 58%. Analyst Michael Olson from Piper Jaffray said that he was very positive about the gaming industry following this data. He is also very confident that retailers would hit their sales goals this holiday season. GameStop was also called a buy by Bank of America Merrill Lynch, with a $59 price target. That would imply close to 30% upside. The firm also stated that GameStop had a bad quarter but a great start to the new consoles being released. The firm called it a choppy quarter but a great start to the new console upgrade cycle. I second this, because GameStop itself stated that it relied on cyclical patterns.
GameStop is undervalued is because of the company's dividend, which is currently above the industry average. Unfortunately for Amazon shareholders, Amazon does not issue a dividend and, in my opinion, is priced very high. Amazon has a current price-to-earnings ratio of 130. GameStop sells for a mere 15 times its earnings. GameStop has a very niche and loyal base of subscribers and is poised to grow. With new products launching, I firmly believe that GameStop will grow as a company.
GameStop has also started to enter into the space of digital games. With the popularity of this space diffusing so much, GameStop has decided to change its business model and has expanded into the digital and subscription model. The last time Microsoft and Sony released their consoles, GameStop's share price doubled in just a matter of 12 months. That said, these are based on intrinsic value with the majority of these reasons being assumptions.
With the gaming industry at its tipping point and GameStop at its low, I firmly believe that the stock will reach new 52-week highs. The new Xbox One and the PS4 have also made it more viable for GameStop to achieve these record sales goals. With recent analyst upgrades and software sales reports, it has helped create a better impression of GameStop's future growth in the long term and the near term alike. I expect GameStop to post record increases in its earnings per share. GameStop will also continue to increase its dividend as the company starts to do well financially.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.