GameStop Corp. (NYSE:GME) investors keep reaching for new levels.
GameStop stock approached a four-year high after Oppenheimer & Co. upgraded the leading video game retailer. Slapping the shares with an outperform rating and jacking up his price target from $27 to $50, Oppenheimer’s Brian Nagel is clearly encouraged by the way things played out at E3 this week.
Electronic Arts Inc. (NASDAQ:EA) stood by last month’s decision to kill its controversial Online Pass that required registrations, forcing buyers of secondhand games to pay a fee to unlock the game.
“The amount of money that we made, it didn’t replace the amount of frustration we put on our customers and it didn’t offset the reputation damage it caused the company,” EA executive Frank Gibeau told gamer blog Joystiq this week.
In other words, even if Microsoft Corporation (NASDAQ:MSFT) is opening the door for publishers to institute their own digital rights management protocol on games for the Xbox One, it won’t be easy. The die-hard gamers have spoken, and they’re ready to blackball restrictive publishers just as they’ve been trashing Microsoft and praising Sony Corporation (ADR) (NYSE:SNE) this week.
This all plays right into GameStop Corp. (NYSE:GME)’s strengths, since the sale of used games and hardware generate its thickest gross margins.
Nagel is encouraged by the developments, and that also includes the surge in popularity for video game consoles and new games that should skyrocket this holiday season.
This all paints a pretty picture, but why is GameStop Corp. (NYSE:GME) trading at its highest levels in nearly five years after years of industry declines?
If publishers are backing away from attacking the profitless resale of their titles, aren’t they doing so because of the possibilities that await in direct distribution? Sony Corporation (ADR) (NYSE:SNE) has made it clear that it’s supporting all models, and that even includes the “free-to-play” approach that many mobile apps embrace. Both new consoles have fat hard drives, but also embrace cloud-based gaming.
GameStop Corp. (NYSE:GME) wasn’t doing so well even before these new machines that will make disc-based gameplay less relevant. The sale of pre-owned titles and gear is actually falling harder than new merchandise sales at GameStop, and that’s before considering that these older games won’t play organically on the PS4 and Xbox One.
Analysts see revenue and earnings slipping this fiscal year at GameStop, and that’s even with the new console boost.
We don’t know how well GameStop Corp. (NYSE:GME) will hold up in this next generation of gaming consoles, but those defending the retailer may feel the same way that bookstore and record store owners felt when their media migrated to digital distribution. It seems highly unlikely that folks will be buying more disc-based games in a web-tethered future, and Microsoft Corporation (NASDAQ:MSFT) even emphasized the same-day digital availability of new games.
The marketplace is changing, and while GameStop Corp. (NYSE:GME) investors have been laughing all the way to the bank in recent months, it seems highly unlikely that they will be the ones getting the last laugh.
The article GameStop Stock: Don’t Look Down originally appeared on Fool.com.
Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft.
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