GameStop: "Perception is the Problem"
11/21/2017 5:00 am EST
Perception is the problem. Investors perceive GameStop as the next Blockbuster. Blockbuster went bust. GameStop, a video game retailer, is vulnerable to the same fate as more video games move to digital format, so the naysayers tell us. The sell thesis is extrapolating and tidy, but it’s not necessarily right.
We’ll concede that GameStop’s largest profit driver, sales of pre-owned physical games, continues to wither. Pre-owned sales fell 5.1% last year; they fell 7.5% last quarter.
The pre-owned physical game business withers. Long-term, the business will eventually die. In the interim, GameStop can continue to milk it for revenue and earnings. GameStop recently launched an in-store rental service called PowerPass.
A six-month subscription costs $60 and lets customers keep one free game after the subscription period ends. GameStop will start selling PowerPass subscriptions next week.Hardware sales, on the other hand, will survive. The business can’t be replicated in the digital world.
Let’s not forget that GameStop is more than physical video games. It has diversified into collectibles. It has moved into mobile retailing.
GameStop is the largest authorized retailer of AT&T (T) mobility offerings. GameStop also owns Simply Mac, the largest certified re-seller of Apple (AAPL) products. Both these businesses grow at double-digit annual rates.
With P/E multiple of 5, a dividend easily covered by earnings, and a 9.3% dividend yield, GameStop is cheap. You don’t buy cheap if you think the business is doomed because it will get only cheaper. We don’t think the business is doomed, though. We think GameStop is cheap. We don’t think it will get much cheaper.