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Bulls Are Right So Far on GameStop Corp. (GME), but Will the Party Continue?

When I wrote about Gamestop (NYSE:GME) last October, the stock was trading at $20 per share and I said it was worth $55 in a best-case scenario. The stock has since risen to above $40 per share — a sweet 100% return for owners of the stock over this period.

My optimism about GameStop Corp. (NYSE:GME)’s future has increased since then, but not because of the large rise in share price. As Benjamin Graham famously warned investors who take their cues from the market, “you are neither right nor wrong because the crowd [agrees] with you. You are right because your data and reasoning are right.”

GameStop Corp. (NYSE:GME)

Instead of the market price, I was focused on whether or not my analysis of Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE)’s incentives to continue including functionality for used games on the next generation of consoles was right. Here’s what I said in the October article:

…the used game market isn’t going anywhere anytime soon. If Sony removes backward compatibility from the Playstation, Microsoft can increase customer satisfaction (and market share) by including support for old games. It is important to remember that consumer behavior ultimately determines production. As long as consumers demand backward compatibility, console-developers will have to give it to them. Thus, I don’t see this being an issue as long as physical disks are used to distribute games

Since GameStop Corp. (NYSE:GME) is increasingly reliant on the used game market for its revenues, it was crucially important for this statement to be correct in order to support a higher valuation. As it turns out, the bulls who believed this statement were right to do so.

Microsoft Corporation (NASDAQ:MSFT) initially announced that its next generation Xbox console, the Xbox One, would not support used games and would instead rely on digital distribution of games. Sensing an opportunity, Sony Corporation (ADR) (NYSE:SNE) launched an aggressive campaign to market the Playstation 4’s ability to play used games. As pressure mounted for Microsoft Corporation (NASDAQ:MSFT) to allow the same, it finally relented and backed off of exclusively relying on digital downloads.

This was a major win for GameStop Corp. (NYSE:GME) bulls — and for consumers. It shows that consumer preferences still carry a heavy weight, even in markets dominated by just a few large companies. However, as technology changes, consumers may start to prefer a method of game acquisition that bypasses Gamestop altogether.

Inevitable demise

The most popular argument among GameStop Corp. (NYSE:GME) bears is that digital distribution is the way of the future. Although I think a full-out move to a digital distribution model is still a couple console cycles away, it will inevitably take hold.

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