The Market Just Doesn’t Get GameStop

On Aug. 26, shares of video game retailer GameStop (NYSE: GME) crashed 10% after the company posted disappointing results for the second quarter.gamestop
Looking back further, GameStop has endured a tough year. GameStop stock is down 32% in the past 12 months, compared with an 11% gain for the S&P 500.
It seems investors are throwing in the towel on GameStop. Its most recent quarterly results did not inspire much confidence, and the market now seems convinced that digital downloading of video games will kill GameStop’s lucrative trade-in business.
However, investors may be overreacting. GameStop’s results could look worse than they actually were, due to very difficult year-over-year comparisons. And, it appears investors are under-appreciating GameStop’s growth in new businesses.

GameStop Stock: A Buying Opportunity

GameStop reported that its same-store sales, a crucial metric for retailers that looks at sales at stores open at least one year, fell 10.6% last quarter. Total sales declined 7.4% for the quarter, year over year, which missed analyst expectations by $90 million.
The key factor for GameStop’s surprisingly large drop in sales was that new video game hardware fell by 33%.
GameStop stock has had a rough year, but this may have simply created a great buying opportunity for value investors. GameStop stock trades for a trailing P/E ratio of 7 and a forward P/E ratio of just 6. By comparison, the S&P 500 trades for a trailing P/E of 20. This is a clear indication the market expects continued deterioration for GameStop.
And, since GameStop stock has been beaten down so badly, its dividend yield has jumped up to 5.2%. This is a very attractive dividend yield, as the average dividend yield of the S&P 500 Index is just 2.1%.
Normally, such a low P/E and high dividend yield would be red flags that the company is in decline. While GameStop’s results look weak this year, it could have more to do with difficult comparisons. The fiscal calendar has now lapped the strong releases of the Xbox One and PlayStation 4 consoles.
This has resulted in a weak year for new video game releases as well.
Furthermore, both Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) have announced their next generation of video game consoles, which caused consumers to put off purchasing consoles last quarter.
But this should just result in pent-up demand. Next year, there is a good chance GameStop will return to same-store sales growth. The odds are improved because of GameStop’s successful entry into new business ventures, specifically its technology brands and collectibles segments.

Not Just a Video Game Retailer

GameStop isn’t just a video game store anymore. It has branched out by building multiple revenue streams far outside video games. First, GameStop has a collectibles business, which grew revenue by 120% last quarter. This strong growth was driven in large part by the recent Pokemon Go craze.
It has also developed a successful technology brands business, which includes the company’s authorized AT&T (NYSE: T) resellers, as well as Simply Mac, which sells and repairs Apple (NASDAQ: AAPL) devices. The technology brands segment posted 55% revenue last quarter, and now represents 24% of GameStop’s total profit last quarter.
Growth in this segment is likely to continue, as last quarter GameStop purchased an additional 507 AT&T stores for approximately $440 million.
The key takeaway is that GameStop is no longer just a video game retailer. In fact, over the first half of 2016, more than half of its operating profit have come from non-physical gaming categories.
With a low P/E and a very high dividend, GameStop stock could be a bargain.
Disclosure: The author personally owns GameStop and Apple.

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