Every Segment Of GameStop Is Set To Report Revenue Growth

Sep. 3.14 | About: GameStop Corp. (GME)

Summary

GameStop’s latest quarter brought an improvement of 25% in the revenue. Earnings improved by 144%.

Awaited game releases for the second half of the year will further boost the sale of consoles and new games, as both of them are interrelated.

Microsoft’s and Sony’s decision to allow older games to run on new consoles will also promote the sale of both the older games and the new consoles.

The company’s foray in mobile and digital content is another factor which will contribute to a healthy top line.

GameStop's (NYSE:GME) share value has fallen down by 16% in one year. The company's business was previously getting hurt due to the games that have emerged on cell phones. However, the new gaming consoles have the potential to revive GameStop's business, and many analysts have now started reversing their negative opinions on the stock. The company is also well poised to take advantage of the growing market for video game products and PC entertainment software.

In this article, I will go through the company's latest quarterly performance to identify key revenue and profit metrics. Later, I will shed light on some qualitative factors, which will underline the future potential of this organization.

Second Quarter

During the period, revenue for GameStop increased by 25.1% to $1.73 billion on a year-over-year basis. Comparable-store sales figure also grew up by 22%, owing to a healthy demand for PlayStation 4 and Xbox One consoles. In fact, as a result of these new introductions, the revenue derived through console selling doubled in the period. Every other major segment, from video games to accessories, also brought a double-digit contribution to the total revenue figure.

Healthy top line is an indication that the company is getting back on its foot. Some may say that the new consoles helped in the revenue increment. However, it must be noted that the consoles make less than 20% of the company's total revenue. The increment came from video-game selling as well as mobile and consumer electronics. The revenue of new video games improved by 15.6%, owing to the release of new titles such as Ubisoft's Watch Dogs and Nintendo's Mario Kart 8. Future game releases will be a key component of revenue increment, and I will talk about this shortly.

Moving forward, the operating income nearly doubled to $36.7 million whereas the operating margin expanded by 70 bps to 2.1%. All in all, the quarterly result showed that the company did not display any sign of being a poor performer. Rather, the company managed to deliver an improvement of 144% in earnings per share, which eventually rose to 22 cents.

For the future, let's begin with the next-generation consoles. Since the launch of these new consoles, category-wide sales of the hardware unit have increased by 140% for GameStop. In a poll conducted by the company recently, 55% of its PowerUp members said they have yet to purchase the new systems. This indicates that there should be stronger hardware sales in the third quarter for the company.

Moreover, strong hardware sales should bring in additional video game revenue as the latter is a by-product of the former. This is because new systems lure gamers to buy new games. To make the prospects even more attractive, there is a huge line-up of popular titles from top developers for the second half of this year. Some of these most-awaited titles include Call of Duty and FIFA. Even though the title line-up for the upcoming quarter is excellent, yet GameStop will benefit more in the fourth quarter, as the company usually produces 40% of its revenue at the end of its fiscal year.

In addition to the above, both Sony and Microsoft have said that their next generation consoles will allow used games to run. Used game's sales have previously been about 65% of new game's sales, and still remain the highest revenue-generating segment for the company. Running old games on new consoles will not only boost the sale of older games, but will also attract consumers to shift to the new hardware systems, eventually pushing up console sales as well.

Furthermore, GameStop has moved to digital revolution. The extra downloadable content "DLC" is presently revolutionizing the gaming industry. In the latest period, the company's digital receipts grew up by 8%, owing to GameStop's proprietary digital delivery system and its popular buy-sell-trade model. I believe that the future growth in the electronic game industry will be driven by sales of inter-game content available in the digital form. This venture is likely to become a major component of future revenue growth for GameStop.

Last but most importantly, the company's acquisition of Spring Mobile and Simply Mac brands has given it a push into mobile and electronic devices market, which is growing very fast. In the last quarter, mobile revenues went up by 85%. The brands also held about 40% of the operating profit growth for the period. The company is on its way to adding 300 to 400 more new technology brand stores, which should also contribute in supporting the top line momentum the company has gained so far.

Bottom Line

Every segment of GameStop is set to deliver revenue growth for the future. Keeping in view the fundamentals, the company is highly undervalued given its PE ratio of 13.5 compared to the industry's 48. The ratio makes sense as well, since GameStop has just begun to enjoy the growth it has set for the future. The company holds no debt, which is another plus. Its projected dividend yield of 3.13% is sufficient to satisfy the dividend-hungry investors. Nonetheless, GameStop is a long-term stock to keep. It holds a strong buy rating.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.