Pokémon GO Propels GameStop

08/11/2016 8:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Pokémon GO is indirectly driving business to our featured recommendation in the video gaming industry, explains Ian Wyatt, editor of High Yield Wealth.

Pokémon GO is a Nintendo (NTDOY) creation, but apparently it is driving business to GameStop (GME); CEO Paul Raines noted that sales were up 100% in 462 stores that are “gyms” in the Pokemon Go app.

The whole Pokémon GO craze — which splices the real world with the digital world — will fade soon enough, but another craze will take its place. GameStop is well-positioned to exploit these types of recurrent crazes.

It turns out that brick-and-mortar retailing bestows its own advantages. GameStop could benefit from augmented-reality trend by becoming phone charging stations for the players.

GameStop can serve as an intermediary, where players can stop and receive hints and tips on the games to keep them engaged. All the while, the associates can cross-sell GameStop offerings. 

Pokémon GO aside, we like what GameStop has done lately to remain relevant. It acquired ThinkGeek, which develops pop-culture themed collectibles, apparel, gadgets, electronics, and toys.

GameStop’s collectibles sales were up 250% to $82.3 million year over year in the latest quarter. Collectibles revenue should hit management’s full-year goal of $450 million to $500 million.

Management expects collectible sales to double to $1 billion by 2019, which isn’t unreasonable. The market is growing at a 10% annual clip.

Tech Brands is yet another growth opportunity for GameStop. This segment includes an authorized reseller relationship with AT&T (T).

The AT&T hookup provides a strong pipeline for future same-store growth. The segment also includes Simply Mac, which sells and repairs Apple (AAPL) devices.

In the last quarter, Tech brands sales were up 62% to over a $165 million; operating earnings grew to $18.8 million compared to $3.1 million a year ago. 

Add to these businesses the potential from new augmented reality games like Pokémon GO and we think our 12-month target of $34 is unduly conservative.

As such, we are raising our target price to $38. GameStop, which currently yields 4.8%, remains a buy.

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By Ian Wyatt, Editor of High Yield Wealth

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