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Game Over for GameStop Corp. (GME)? Nah…It’s Ready to Go Up One Level

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While being lazy this weekend, I stumbled across one of my favorite picks which I had last covered a long time ago. What pleased me is that the stock has returned almost 50% since I last looked at it more than 9 months ago, compelling me to take a detailed look at it once again.

Being a video game enthusiast, the terrific stock price appreciation of video game retailer GameStop Corp. (NYSE:GME) certainly brought a smile to my face. While the Street was clamoring about GameStop Corp. (NYSE:GME)’s dying business, I had faith. The company was trying to turn around. It was trying new things — such as selling pre-owned games and devices, and boosting digital content sales among other things.

GameStop Corp. (NYSE:GME)

Such moves led me to believe that GameStop Corp. (NYSE:GME) had a fight left in it, and not everything was lost. The stock’s solid performance vindicates my view, and the fact that it jumped around 5.8% last week even after issuing a gloomy outlook suggests that investors are optimistic about its prospects.

Light at the end of the tunnel

GameStop Corp. (NYSE:GME) handily beat analyst estimates in the previous quarter, posting revenue of $3.56 billion and adjusted earnings of $2.16 per share. Analyst estimates called for revenue of $3.46 billion and earnings of $2.09 per share. Same-store sales declined 4.6% and revenue was almost flat from last year, as weakness in GameStop Corp. (NYSE:GME)’s traditional business was offset by its new strategies.

However, the company’s outlook wasn’t exactly awe inspiring. GameStop expects to earn $2.75 to $3.15 a share this year, which lags the analyst consensus of $3.38 per share by quite some distance. Despite this, positive commentary from management about the company’s prospects later this year gave confidence to GameStop Corp. (NYSE:GME) bulls.

Booster packs

GameStop’s console business — which includes hardware, software, and digital and forms its core — has been hurt in recent times as the current console generation is at the end of its lifecycle. This has led to declining hardware and software sales, as consumers have been putting off their purchases while waiting for the next gaming console generation.

As a result, GameStop expects a weak 2013, but it is highly optimistic about the following two years for reasons which are very simple. The company expects its resurgence to begin in the back-end of the year, when the first of the next-gen consoles in the form of the Sony Corporation (ADR) (NYSE:SNE) PlayStation 4 is expected to arrive.

Sony had held an event earlier this year, where it revealed the technical specifications and showed-off the controller. However, there was no concrete announcement regarding pricing or availability, but Sony would probably make the console available just before the holiday season this year. GameStop expects that the introduction of just the PlayStation would lead to double-digit console growth in 2014, while the addition of the next version of Microsoft Corporation (NASDAQ:MSFT)’s Xbox would propel console growth in the 20%-plus range.

The launch of new consoles will undoubtedly lead to better times for GameStop, as the launch of the Nintendo Wii U already had a positive effect on sales in the previous quarter. In comparison, the launch of much more famous consoles from Sony and Microsoft should have an even greater effect.

Game over? Or just a difficult level?

However, there are a few riders — such as price of new consoles, availability of titles, game pricing – which can affect console sales. But, the most threatening ones for GameStop are the method of delivery of games and probable blockage of used games.

Neither Sony nor Microsoft have cleared their stance about whether or not they would allow used games on the next-gen consoles. Rumors suggest that Microsoft’s next Xbox would allow users to download a game and install it on the hard-disk, while Sony might be devising a method wherein only one user can use a single copy of a particular game.

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