Why GameStop's Purchase Of AT&T Stores Is A Smart Move

| About: GameStop Corp. (GME)

Summary

GameStop acquired another 507 AT&T wireless stores and this is a smart move because it diversifies its revenue stream.

The timing is also very good because current management guidance does not include Xbox S, PlayStation VR and PlayStation Neo.

I remain positive on GameStop and continue to like it for its good dividend and potential growth.

GameStop (NYSE:GME) reported that it acquired 507 AT&T wireless stores in an effort to diversify its business away from video games. The stores are located in 26 states so this adds to the geographic diversification aspect for GameStop. The biggest share is in Texas, followed by Missouri and Oklahoma. This deal expands the company's AT&T wireless stores to 1,421, making it the largest authorized AT&T Mobility reseller in the country.

I think that the number of stores and the timing are both right for GameStop because the current guidance does not include the impact from Xbox S launch and PlayStation VR that are scheduled to hit the market in the second half of the year. In addition, there could be more upside potential from the release of PlayStation Neo, which is widely expected at the Tokyo Game Show in September. So in reality the potential upside from Xbox S, PlayStation VR and PlayStation Neo are not in the current guidance and I think this is bodes well for GameStop because it allows the company to surprise the market on the upside.

I have written a detailed analysis on GameStop titled "Why GameStop Is A Hidden Value Play" and I believe that GameStop's market leading position in physical game sales will be important as games progress towards virtual reality where in-store demonstration is really important. This is because VR headsets are quite expensive so virtual reality game developers will rely on demonstrations to persuade the gamers to spend $600 on a headset and possibly $1500 on a gaming PC. GameStop is the ideal spot to demonstrate the power of virtual reality games as consumer interest increase. This will help GameStop to generate store traffic, cross-sell gaming accessories and video game consoles when Microsoft (NASDAQ:MSFT) releases the new Xbox in the coming months.

The acquisition not only allows GameStop to expand its footprint but also diversify away from game sales by moving into wireless. So far, mobile and consumer electronics is around 10% of GameStop's revenue and I think the 1,412 reseller stores could allow GameStop to diversify its revenue. An interesting angle is that AT&T could increasingly rely on GameStop to sell its wireless and bundled products such as DirecTV. Recall that AT&T's last quarter saw pretty weak video subscriber base growth so GameStop's resellers will be important for AT&T to use to market its bundles. The current number of GameStop stores plus the 2,100 owned by AT&T will be important for AT&T to market its wireless products as the average revenue per user begin to stagnate.

In conclusion, I continue to like GameStop and continue to see the company making the right moves to expand its footprint and be competitive in the video game and wireless sales business. I also like the company's capital return program and believe that its current 5.5% dividend yield remains very attractive.

Disclosure: I/we 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.

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