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GameStop Corp. (GME): Will This Stock’s Sizzling Streak Continue?

This has been a phenomenal year for video game retailer GameStop Corp. (NYSE:GME) as it has seen its stock rise more than 60% so far, which has come as a surprise to many. Shares have risen despite declining revenue and earnings, and this is probably one of the reasons there is huge short interest in GameStop Corp. (NYSE:GME) with 46% of the float held short at the end of April (according to Yahoo! Finance).

However, investors seem to have recognized the company’s turnaround efforts and the catalysts ahead, and this has probably led to the stellar performance this year. The bulls are currently winning against bears, and it is quite evident as they are running for cover with the short float declining by around 5 million shares from March to April.

GameStop Corp. (NYSE:GME)’s resilience will be put to test once again when the company reports first-quarter results on May 23. Let’s take a look at what’s expected from GameStop Corp. (NYSE:GME) and how its outlook might turn out.

On revenue

Analysts, according to Yahoo! Finance, expect GameStop to post revenue of $1.84 billion, down 8% from the prior-year period and in line with the company’s own expectation. GameStop shouldn’t have much difficulty in at least meeting this estimate, as the company had called for a revenue decline of 6%-8.5% when it last reported earnings.

The company’s revenue has been in a continuous decline along with same-store sales, which are expected to fall 5.5%-8%. However, one thing really jumps out when looking at these figures. Exactly a year back, when I’d covered GameStop after its first-quarter results, revenue had declined 12% and same-store sales had fallen 12.5%.

Thus, the upcoming quarterly results will no doubt be an improvement from the carnage that we saw last year, and they undoubtedly indicate that the company’s turnaround efforts have borne fruit so far.

On earnings

Analysts expect GameStop to earn $0.40 a share, down from $0.54 per share last year and in-line with the company’s own expectation of $0.38 to $0.43 a share. The company’s dropping top line has undoubtedly affected its bottom line as well and it isn’t expected to grow this year. The full year earnings forecast of $2.75 to $3.15 a share that GameStop had issued last time was well below the consensus estimate of $3.38.

Needless to say, estimates have moved lower since then and now sit at $3.11 a share for the fiscal year, below last year’s earnings of $3.17. Earnings growth is expected to return next fiscal year, with analysts anticipating GameStop to earn $3.70 per share, and this is quite a possibility with the expected improvements in business.

On outlook

It goes without saying that the outlook will be the most watched aspect of GameStop’s upcoming results. Shares have rallied since GameStop’s last earnings release on the back of the positive commentary for the latter half of the year. The company expects the launch of new gaming consoles and blockbuster games from major publishers to be major tailwinds in the holiday season.

The launch of the Sony (NYSE:SNE) PlayStation 4 and the next Xbox from Microsoft (NASDAQ:MSFT), which mark the beginning of the next console cycle, should help GameStop’s prospects. The launch of the PlayStation 4 from Sony is expected to result in double-digit growth in console sales next year. According to a poll by GameStop, the majority of its consumers are really looking forward to Sony’s upcoming console and it isn’t surprising why the retailer is pinning its hopes on the PlayStation 4.

Once Microsoft’s upcoming Xbox is thrown into the equation, GameStop expects console sales to grow upwards of 20% next year. However, investors should keep in mind that console adoption might not take off right from the start as various factors — such as pricing, game availability etc. — would be at play. Moreover, there is the talk of Microsoft and Sony could probably make pre-owned games extinct, and if this happens, then there would be serious implications for Sony, Microsoft, and GameStop.

Pre-owned games are one of the revenue drivers of GameStop, and if a console maker such as Microsoft opts to distribute games digitally by providing users with direct downloads and install the game on the hard-disk, then the pre-owned business will be in doldrums. However, I believe that neither of the console makers would opt for such options as this would hurt sales since downloading games over the internet would require huge amounts of data transfer.

Among the other major catalysts is the huge number of games slated for launch later this year. Cult titles from major publishers such as Disney, Activision Blizzard, Take-Two Interactive, and Electronic Arts should have a positive effect on GameStop’s business going forward.

Moreover, GameStop’s rebound doesn’t depend on just the new console cycle. As Fool analyst Demitrios Kalogeropoulos pointed out, the company’s mobile business and its digital sales are growing at a rapid pace and also helping the company’s margins. Thus, while the pre-owned game business might take a hit going forward, fast improving sales of these two segments should act as a cushion.

Ready to be bought?

Overall, I don’t expect the company to bump up its outlook and maintain status quo at least for now. However, I’m still bullish about the company’s prospects and its cheap forward P/E multiple of around 11 times and a low EV/EBITDA multiple of 4.95 are too compelling to ignore right now. The company sports a dividend yield of 2.80%, has no debt, and carries around $640 million in cash on the balance sheet.

GameStop looks like a good turnaround play and shares could rise further in the future as the new console cycle kicks in and growth in its other businesses continues. For more insight and the complete analysis of GameStop’s upcoming results, don’t forget to tune into this space once again this week.

The article Will This Stock’s Sizzling Streak Continue? originally appeared on Fool.com and is written by Harsh Chauhan.

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