Will The Wii and PS3 Make a Buy for GameStop?

By: Dennis Biray
Submitted: 2007-01-17 16:17:39
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As both Sony’s PS3 and Nintendo’s Wii will be released this month (November 2006), you might be interested in purchasing shares of this relatively new company, GameStop (GME) on the basis of increasing sales and revenue from selling these systems. While such a deduction may make sense for a fruitful appetite of purchasing shares, there may be some limitations to the success you may enjoy.

As GameStop will be releasing earnings in about two weeks, there is much questioning in terms of how earnings will perform with these new systems coming out in a relatively short time. While these factors will not be directly observed in this quarter’s report, there is a high chance that an increase in consumer consumption on products GameStop sells will rise dramatically over the next few months. Already selling out of pre-orders for these revolutionary gaming consoles, with the strong support of games available for these systems, along with a high price retailed, for at least the PS3, loyal gamers, whether they can truthfully afford the system or not, will not be hesitant to immediately purchase their respective console as soon as they can. What that means is that a company like GameStop will seem a tremendous boost in fundamentals because of large sales and purchases. Already looking at margin increases over the past year after Microsoft’s Xbox 360 released, GameStop has produced over a 70% increase in revenue which includes doubling its operating income. If such fundamentals grew at such high levels just based on one system release, imagine how both Nintendo’s Wii and Sony’s PS3 will be beneficial to this company.

While such may be a valid argument, other investors may say that since GameStop does not support the same P/E ratio that competitors such as Best Buy have and is trading at a record high, such may lead to an overvalued equity ready for a drop. Looking at this data, if no new video gaming consoles or gaming revolutions were to be instated during this time, I would completely agree with the notion of taking some profit off the board. However, because of the amazing hype for these consoles and tremendous opportunity for a growing gaming demographic, such an upgrade will only have positive effects on the share price. To provide proof for this statement, when looking at how GameStop shares were affected by the launch of the Xbox 360, GameStop’s share price rose almost 40% during that time period which includes Christmas numbers, sparking a tremendous rise. Now that we have two consoles to be released, targeting two different demographics, investors should see the share price rise even further, creating new record highs.

In addition to this, I would arguable say that GameStop is not only a buy in the short term but a buy in the long run as well. As video games continue to gain popularity over the television and movie industries, companies like GameStop will flourish to consecutive record highs for possibly decades. While such growth may not be a yearly 40% increase such as the one previously examined, with the continued growth of this gaming sector, and the inevitable release of new gaming systems, even with a cautiously high price, I would absolutely label GameStop as a strong buy.

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