After falling out of favor with investors and analysts, I believe Gamestop (GME) has several years of growth and improved profits ahead of it. These ideas, powered by the launch of three new gaming consoles, create a buying opportunity of the shares. Bears of the company believe the chain will go the way of Blockbuster and close its doors as it falls victim to internet sales. If you honestly believe that the launch of three new consoles over the next two years will lead to Gamestop stores no longer existing, then this article is not for you.
Last month, I wrote an article about Nintendo (NTDOY.PK) and their launch of the new Nintendo WiiU console. The newest console is going to be released November 18th, in time for the holiday season of 2012. Pre-orders of the console have been selling out for retailers including Gamestop. Gamestop has quit taking pre-orders, but has started a waiting list exclusive to its rewards members. Members of Gamestop's PowerUp Rewards can join the waiting list for the high demand console.
Coming in time for the 2013 holiday season is new consoles from Microsoft (MSFT) and Sony (SNE). In a little over a year, GameStop stores will be filled with three new consoles and new games for these newly launched consoles. The last time there were three fairly new consoles in Gamestop stores, shares traded above $28. The XBOX 360 was released November 22, 2005, while the Nintendo Wii (Nov 19th 2006) and the Playstation 3 (November 11th 2006) would be released a year later.
Here is a look at where GameStop shares were trading around the releases:
· November 21, 2005: $18.27
· November 20, 2006: $28.33
· December 24, 2007: $62.30
As you can see, shares increased 55% from one holiday season to the first full season with three new gaming consoles in stores. The following holiday season saw shares hit $62.30, an all time high share price. I expect a similar thing to happen with this gaming console cycle. Shareholders should be patient as shares could actually hit their highest level in 2014 after the second holiday season featuring all three new consoles.
There are 6,628 Gamestop stores in fifteen countries around the world. The retailer is the leader in the video game sector, but faces heavy competition from big box retailers and the internet. Stores like Best Buy (BBY), Target (TGT), and Wal-Mart (WMT), and internet retailers like Amazon (AMZN) also sell video games and consoles. The company has no debt and has a book value of $22.40. Shares are undervalued and entering a key moment in the company's history.
Along with new consoles, Gamestop is entering the popular tablet market. On October 31st, stores will have the new Wikipad tablet for sale at a price of $499. The Wikipad tablet is the first tablet to feature an attachable controller and is loaded with video games, making it a natural fit for Gamestop's normal customers. The tablet supports Playstation mobile's platform.
Gamestop is also a reseller of Apple (AAPL) products like the iPhone, iPad, and iPhone. The retailer offers owners of Apple devices cash or trade-in values for their electronics. With Apple products being as popular as ever, Gamestop can maintain strong margins on used electronics, like it does on reselling used video games. In the second quarter, mobile (tablet and pre-owned iDevices) sales hit $29 million. The company forecasted the fiscal year to have mobile sales of $150-$200 million.
In the most recently reported second quarter, Gamestop once again saw sales fall. Revenue dropped 11.1% to $1.55 billion. Same store sales at locations dropped 9.3%, due to slow traffic and a lack of new releases for blockbuster video games. Despite the decrease in sales, Gamestop saw increases in its other sales (+40.6%), digital (+27.0%), and mobile categories. The company saw net earnings of $21.0 million, or $0.16 per share.
Gamestop repurchased 7.6 million shares during the second quarter. Gamestop paid $136.4 million for the shares, representing an average price of $17.96 per share. Gamestop has $301 million left on its current share buyback program. If Gamestop bought back all $301 million worth of shares today, they would retire 11% of outstanding shares.
The company will report third quarter earnings on November 12th. Gamestop expects earnings per share of $0.28-$0.36 in the quarter. Same store sales are expected to drop 5-10% in the quarter. For the full fiscal year, Gamestop forecasts earnings per share of $3.10-$3.30. Same store sales are forecasted to fall 2-10% for the full fiscal year. Analysts on Yahoo Finance see the company earning $0.33 in the third quarter and earning $3.13 on the fiscal year. The following year, analysts see the company reporting a profit of $3.41 per share. The company has met or beat analysts' estimates each of the last four quarters.
Since my Nintendo article, shares of the console maker have shot up from $15 to $17.59, representing a gain of 17%. I still believe Nintendo shares will hit $20 by the end of the year, representing a short term gain for investors capitalizing on the strong demand of the new console. I think patient investors could see stronger gains by purchasing shares of Gamestop and sitting on them for the next several years.
Shares of Gamestop have traded between $15.32 and $26.66 over the last fifty two weeks. Patient investors will also be rewarded with a 4.4% dividend yield. Analysts are only expecting sales to increase from $9.0 billion to $9.1 billion from fiscal 2012 to fiscal 2013. I think analysts are highly underestimating the amount of consoles that will be sold next holiday season. I think shares represent a great buying opportunity for the next three years. I think this holiday season will set the table with the first season of the new Nintendo WiiU.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GME over the next 72 hours.