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GameStop Corp. (GME): What’s the Endgame for This Company?

GameStop Corp. (NYSE:GME)GameStop Corp. (NYSE:GME) has enjoyed an extraordinary run over the past year, which is interesting considering revenue declined and earnings fell into the red in 2012. With failure of many of its physical video-game store rivals, GameStop Corp. (NYSE:GME) now owns nearly 50% market share for popular gaming hardware and software. GameStop is also the top destination for the buying, selling, and trading of video games. The company has made several strategic moves to help drive top-line growth, but there is one likely outcome that many investors might be overlooking.

Industry trends

GameStop Corp. (NYSE:GME) has an advantage over physical and online rivals for several reasons:

  1. Games are early to the market
  2. Largest title collection
  3. Gamers can trade in their iPhone, iPad, iPod, or tablets for games and accessories
  4. The most used games you will find anywhere

Almost half of GameStop’s profits come from used games. At the present time, this is a big positive as demand for used games is high. If you look at the average gamers, they’re in their teens or young adults. Teens can’t afford new expensive titles, and with the middle-income consumer struggling, it’s less likely that their parents are going to shell out $50-$60 for a new video game. Many young adults either have student-loan debt or they can’t find a job. Those who can find a job aren’t likely to be paid well. These individuals would also prefer to spend money on a used game opposed to a new one. This aspect of GameStop Corp. (NYSE:GME)’s business should be sustainable unless a bigger company like Wal-Mart Stores, Inc. (NYSE:WMT) expands its gaming segment and offers a better deal to consumers.

Currently, it doesn’t look like this would be a possibility, but it’s important to understand that Wal-Mart Stores, Inc. (NYSE:WMT)’s ultimate goal is to sell everything at better prices than other retailers, and to simply rely on volume for growth. In other words, Wal-Mart might eventually tread on GameStop’s territory. The good news is that Wal-Mart Stores, Inc. (NYSE:WMT) is highly strategic in its expansion plans, and it believes in a slow, calculated, and steady approach. GameStop Corp. (NYSE:GME) isn’t in its sites yet. GameStop’s PowerUp Rewards program has more than 30 million customers, but customer loyalty will only go as far as the savings that are offered compared to competitors.

Future demand

Despite a weak consumer, future demand for the Microsoft Corporation (NASDAQ:MSFT)’s Xbox One and Sony’s PS4 should be strong. Many gamers are aware that these consoles are supposed to be released during the holiday season, so they’re either waiting for one as a gift from a family member, or they’re setting money aside to make a purchase.

The release dates recently moved from the holiday season to November, but don’t be surprised if they move up to October — both companies will want to get a head start on the other. Regardless of when they’re released, GameStop Corp. (NYSE:GME) sales should skyrocket. The stock has partially been trading in anticipation of this event, and the stock will likely continue to move higher as long as the broader market holds. But there’s one logical problem here: This is likely to be a buy-on-the-rumor/sell-on-the-news event. Sales might be good after the holiday season, but future growth potential will decline. Considering traders and investors like to look ahead, not backward, many of them will exit the trade, which would send the stock price lower.

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