thetruth2012 (< 20)

GameStop: The Rodney Dangerfield of the Stock Market

January 31, 2012 – Comments (0) | RELATED TICKERS: GME

Like Rodney Dangerfield, GameStop gets no respect. GME has the highest percent of outstanding shares short on the S&P 500. These short sellers would like you to believe that GME is going the way of Block Buster and Borders into a digital demise. Further analysis of GameStop shows that GME is more like Apple and MasterCard as these companies are three of 24 companies on the S&P 500 that are debt free.

Let us take a closer look at the digital demise thesis. Short sellers would like you to believe that overnight, consumers have stopped going to brick and mortar stores and are downloading games entirely over the internet. In GME’s holiday sales release numbers GME produce software sales increases of 9.9% showing that consumers still are buying video games at retail stores. There are many barriers into the fully digitalization of video games. From a consumers stand point; Download speeds are still too slow, a digital copy of a game limits the ability to share with friends or resell the game, and online security continues to be a major problem. Xbox 360 and the PS3 have both faced serious hacking and phishing attacks. In 2011 alone the PS3 store that sells downloadable games was shut down for 21 days. Numerous maintenance updates kept the PS 3 store down for additional time. The Xbox 360 also requires users to pay a monthly fee of $9.99 to access its online store. This fee acts as a barrier for many consumers.

From a publishers stand point having a purely digital product could lead to more piracy. Crysis 2 took the dubious accolade of the 2011 most pirated game. Torrent Freak estimates that Crysis 2 the PC version was illegally downloaded 3,920,000 times. Compared to sales estimates of Crysis 2 PC 480,000 and Crysis 2 Xbox and PS 3 1,980,000 the physical release of discs seems to be a better business model to combat piracy.  With SOPA and other piracy bills dead in the water in DC, many publishers may want to think carefully about which distribution models prevent piracy.

GameStop has not stood by stagnantly as publishers consider entering a digital model. GME has evolved digitally; acquiring companies such as Impulse a digital PC game distribution platform, Spawn Labs a streaming technology company, and Kongregate a social and browser game site. These acquisitions have paid off with GME posting a 60% surge in digital sales. GME continues to evolve, diversifying its products by recently entering tablet sales and applying their highly lucrative used model to Apple products. GameStop now sells iPods, iPads, and iPhones used, and accepts trade in for these devices.  Shoppers continue to like the small stores and wide selection of new and used games as evident by the explosive growth of their PowerUp Rewards program growing from 4.5 million members to 15.5 million in just a year's time. Rewards members shop the store an average of once a month. Since the release of the last consoles GME has purchased many of its competitors including EB Games and FuncoLand. With the confirmation of Nintedo’s Wii U 2012 release, the predecessor to the Wii, GME stands to benefit from having a larger market share.

Since January of 2010 GME has given back to shareholders about $1.1 billion in stock and debt buybacks. GameStop is now debt free and has plenty of free cash flow to issue a dividend. It is time that investors give GameStop some respect.