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I have a Gamestop gift card and was debating on getting the new zombie map pack but I just want to be sure about how a digital download works before I buy it. Everything good happens at the worst time while i have the monkey throw. Buy Xbox Live Points from Amazon, apply code to your Xbox One, download game. But buying digital from Gamestop, especially, if there's a wait,.
It has been a rough year for GameStop (GME) investors. Despite a recent surge after it confirmed it's looking into selling the company, the stock has sunk once again below $13. However, I believe the investment thesis for GameStop is far stronger now than it was in the beginning of the year.
For those unfamiliar with GameStop, according to their website, they are 'a global retailer of multichannel video game, pop culture collectibles, consumer electronics and wireless services, operating more than 7,100 stores in 14 countries across Europe, Canada, Australia and the United States.' The company owns a number of brands, including EB Games, Spring Mobile, Simply Mac, and ThinkGeek. For the purposes of this article, I will focus primarily on their bread-and-butter video game business and their collectibles business.
Digital Vs. Physical
It's the video game brick-and-mortar business that bears think will become irrelevant with the trend of gaming moving to digital rather than physical purchases. For years, GameStop's differentiating factor from other retailers was its one-of-a-kind buy/sell/trade program, in which their consumers would trade-in used games which they would then resell at a healthy margin. However, this model is threatened by the increasing number of digital subscription services, like Playstation Plus from Sony and Xbox All Access from Microsoft (NASDAQ:MSFT).
Nintendo (OTCPK:NTDOY) also launched an online service in September, Nintendo Switch Online, which is quite different from the other services. The primary benefit is online multiplayer, cloud save-data backup, and exclusive deals. It does not offer a rotating selection of free games for download like the other services. The Switch also has only 32GB of internal storage. While some games like 'Mario Kart 8 Deluxe' take up 7GB, others like 'Dragon Quest Heroes' 1 and 2 take up around 32GB! Therefore, one would almost certainly need to purchase a MicroSD memory card, which would run about $40 for 200GB. Given the lack of incentives to switch to digital purchases in the Nintendo's ecosystem, GameStop's physical disc sales for the Switch should be safe for some time.
Gamestop Digital Download Wait Time For Mac
Even outside of the Switch ecosystem, physical discs have advantages over digital purchases. First, digital downloads cannot be resold. Second, while this may be a matter of personal opinion, physical copies make far better gifts and can be returned if unwanted. This is a particularly reassuring point given much of GameStop's sales are during the holiday season. Physical products also appeal to collectors, especially as GameStop often stocks limited-edition versions of games.
Also, depending on one's internet connection speed, driving a few miles to the nearest GameStop is faster than the nine hours it would take to download 'Red Dead Redemption' (considering an average U.S. broadband connection of 26 Mbps), and definitely speedier than waiting for two-day Prime shipping from Amazon. Lastly, it is questionable how much ownership a consumer truly has when they make a digital purchase; when a console reaches the end of its life, the service to download previously purchased games could eventually be revoked. Compare this to owners of physical discs, who do not rely on the continued existence of an online service.
Earnings Will Improve in 2H 2018
Now, you might be thinking, if digital downloads are not eating GameStop's lunch, why are earnings declining? Let's take a look at the sales and margins from the last earnings report.
Source:GameStop Investor Relations
GameStop on a YoY basis has decreasing pre-owned game sales and margins on these sales are also lower, from 45% to 43.7%. Management has said that there was a lack of Nintendo Switch products available in pre-owned inventory, leading to this decline. The decreased sales in new video game software are also not a surprise, as management stated in earlier earnings reports that the number of top-notch game releases are skewed toward the second-half of 2018. Not only are there weaker titles in the first half of 2018, but by comparison, 2017 had an explosive start coinciding with the surprise success of the Switch.
The second half of 2018 should be bolstered by AAA games like 'Red Dead Redemption' and 'Super Smash Bros Ultimate.' However, we also see some good news in these statistics. GameStop's renegotiation of terms with AT&T (NYSE:T) for their Spring Mobile Business is bearing fruit, as margins increased from 73.8% to 78.4%. Collectibles also make up a larger percentage of sales and is growing nicely at over 10% YoY. Note that there are rumors circulating that an updated Switch console will be released in 2019, which could boost trade-ins for existing Switch consoles.
Another tailwind is the Toys 'R Us bankruptcy, which presents an excellent opportunity for the retailer to acquire new customers. I will be paying particular attention to the next two earnings calls. After these, we will we know if GameStop is in secular decline or if this year's results were just a regular blip in the console release cycle.
Collectibles Are a Move in the Right Direction
One thing I believe GameStop should definitely avoid is pivoting away from their retail expertise by changing their entire business model. GameStop's stores are relatively small and optimize their usage of space. There is simply no monetary advantage from taking floor space from merchandise and converting it into a VR gaming area or e-sports community hub. I believe GameStop's increasing emphasis on collectables is the right decision and capitalizes on appealing to their existing customers.
Earlier this year, GameStop hired Walmart's (NYSE:WMT) merchandising veteran, Dawn Henry, as vice president of its ThinkGeek division. This is a smart move because it strengths GameStop's ability to sell even more exclusives. Exclusive merchandise and apparel provide the company with a much-needed differentiator over big-box retailers and give consumers a reason to stop by GameStop or to shop online at ThinkGeek. GameStop has executed excellently in this front in the past, with products like limited-edition Nintendo Amiibos, Pop figurines, and board games.
Safe Dividend
Gamestop Digital Download Store
Lastly, on a fundamental basis, GameStop shares are incredibly cheap. During the last earnings call, management reiterated their full-year guidance of adjusted (non-GAAP) earnings of $3.00-3.35 per share; on a forward basis, GameStop shares trade at under 5 P/E. What is most important to me is the dividend payout ratio, which at the low end of their estimate is about 50%, so the 11% yield is well covered. It is also not in management's best interest to cut the dividend. If they cannot make the case for how the company earnings can sustain a dividend, it will be even harder to prove the future value of the business to prospective private equity buyers.
Conclusion
I expect that physical discs and brick-and-mortar retailers will have a place in the future of video gaming. GameStop does not need to excel or even grow for one to make money with the current valuation. Because one will be paid handsomely to wait for either a buyout to occur or for the market to realize GameStop is not approaching bankruptcy in the near future, I believe this underappreciated retailer's stock is a solid buy under $14.
Disclosure:I am/we are long GME, NTDOY.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Gamestop Times Open
The rising trend toward game downloads will hurt GameStop stock (GME), according to Bank of America Merrill Lynch.
The firm reiterated its Underperform rating for GameStop stock on Friday, predicting the company will report earnings below expectations this fiscal year. Bank of America Merrill Lynch analyst Curtis Nagle pointed to “earnings risk from the company’s non-gaming segments,” saying “we have grown more cautious on [GameStop’s] core gaming business.”
Gamestop Digital Download Wait Time
“We see increasing structural headwinds including digital penetration... increasing in-game transactions and content subscriptions,” he wrote.
GameStop stock closed down 2.2% on Friday, to $14.73 per share. Its stock has declined 18% so far this year. Nagle reaffirmed his $10 price target for GameStop stock, representing 32% downside to its current price.
The company did not immediately respond to a request for comment on the report.
Gamestop Digital Download
GameStop is the largest retailer of physical game software in the world, with roughly 3,800 stores in the U.S. and about 2,000 outlets in international markets.
Gamestop
Nagle cited research firm NPD’s September report, which said that 46% of total videogame sales came from digital downloads, up nine percentage points from the previous year. He also said too many quality games are being released in a short time frame this holiday season, potentially hurting overall sales. Nagle estimated that GameStop will generate fiscal 2019 earnings per share of $2.87, versus the $3.00 Wall Street consensus.