Video game retailer GameStop's(GME) - Get Report shares took a beating Friday on weaker-than-expected revenue and same-store sales and were down more than 10% with about 30 minutes left in the trading session.
Investors should pay close attention to the company's quarterly results, because they could indicate that a change is underway in gaming, one that could hurt GameStop in the future.
For the quarter, GameStop reported adjusted earnings per share 27 cents, beating the average estimate from analysts by 1 cent but less than the 31 cents the company reported in the year-earlier quarter. The real disappointment came on the sales front. Revenue of $1.63 billion was less than the $1.72 billion analysts were expecting and well off the $1.76 billion GameStop posted last year. Perhaps worst of all, same-store sales declined 10.6%, well more than the 5.9% decrease analysts were expecting.
That decline was shocking and could portend more sales slumps, putting the stock into a group of particularly dangerous investments.
Management blamed a lack of new video games for the sales drop and said pre-owned video game sales outperformed the new-game business during the quarter, although that wasn't enough to keep sales in the positive growth range. A lack of recent releases of big-name titles from either Activision Blizzard or Electronic Arts certainly played a role in GameStop's struggle during the quarter, but there may be more to the story than that.
During GameStop's second quarter there actually was a new game on the market that had massive title and name recognition; it just wasn't played on traditional stationary gaming consoles. It's called Pokémon Go!
Nintendo Pokémon Go took the U.S. and other developed countries by storm during the second quarter. And not only avid video game players where playing it, but nearly everyone between the ages of 20 and 30. Pokémon Go's release and popularity certainly had to have some effect on GameStop especially because Pokémon Go is not only played on a cell phone, but outside the home.
Although it is still hard to argue that games on cell phones compare to the quality of those on traditional gaming devices, the fact remains that gaming is evolving. Pokémon Go not only had millions of people playing games on their cell phones, but it had people actively leaving their homes to play games, away from where their traditional gaming consoles are found.
While the Pokémon Go craze will certainly die down and GameStop will perform well again the next time a big-name title is released, investors need to watch and see how mobile gaming evolves and whether Pokémon Go was a one-time phenomenon or the start of a new trend.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.