GameStop: Video Value?

06/17/2016 7:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Video games are a leading diversion, both here and abroad. Global video-game revenue runs at over $100 billion annually, reports growth and income expert Ian Wyatt, editor of High Yield Wealth.

GameStop (GME), the world’s largest retailer of video game products and PC entertainment software, sells its video-game wares through 3,959 U.S. and 2,024 international locations.

In addition, GameStop publishes Game Informer magazine, the industry's largest video-game magazine, with 7 million paid subscribers. 

GameStop’s shares are down 34% over the past year. Investors are fearful that the video-game trend favors digital downloads over video-game disks.

Yes, that market will grow, but not as rapidly as the GameStop naysayers predict. The ever-expanding size of games causes significant issues for digital-only machines, for both download times and storage capacity.

Meanwhile, the video-game business is a cyclical business and the cycle for the current generation of consoles (Wii, Xbox and PlayStation 3) peaked in 2012.

The upcycle will likely start anew next year. Nintendo's next console is set to hit store shelves in March 2017.  More new consoles could be on the way and we could soon see the next-generation Xbox and PlayStation consoles.

Earnings per share of $1.75 in 2008 grew to $3.78 last year. That’s 10% average annual growth.

Earnings growth has outdistanced revenue growth because of reduced share count. Over the past eight years, shares outstanding have been reduced 35%. 

The current dividend payout yields just over 5% at the current market price.

Its shares trade just over 7 times this year’s expected earnings estimate. That’s value.

We’ve put a 12-month price target of $34 on GameStop. We’re looking at nearly 20% upside potential. Now, toss in the yield and a 25% total return is easily within the realm of possibilities over the next 12 months. 

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By Ian Wyatt, Editor of High Yield Wealth