GameStop's problems are driven by a weak period for video game sales. With the Xbox One and PlayStation 4 gaming consoles nearing maturity, sales of both hardware and software have fallen significantly over the past year.
And, investors are pessimistic about a video game bricks-and-mortar retailer such as Gamestop, as digital downloading gains momentum among consumers.
This all seems like reason to avoid GameStop entirely. But there are many reasons to believe the huge selloff in GameStop shares could be a great buying opportunity for forward-looking investors.
GameStop is a bargain dividend stock, a rarity in today's market. You can learn how to find bargain dividend stocks here.
The stock trades for a trailing 12-month price-to-earnings ratio of 7.4 and a forward price-to-earnings ratio of 6.6. These valuations are significantly below the average valuation of the S&P 500.
Plus, GameStop's huge selloff has pushed its current dividend yield to a robust 5.3%, making the company a high-dividend stock. GameStop is an attractive stock pick for value and income investors.
First, GameStop has repositioned its business model. It has expanded significantly into other business areas that are growing rapidly, including collectibles and smartphones. Revenue in the collectibles business more than doubled in the second quarter, thanks to successful results for ThinkGeek.com and also the Pokémon Go boom.
In addition, GameStop has built a significant operating segment called Mobile and Consumer Electronics. Sales in this segment soared 43% last quarter, to $203.3 million, driven by the Technology Brands category, which includes authorized AT&T resale stores and Simply Mac, which sells and repairs Apple devices.
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Last quarter, Technology Brands revenue increased 55% year over year.
Technology Brands is quickly becoming a major piece of the overall business. This segment now makes up 24% of the company's earnings, as GameStop has aggressively added AT&T Mobility stores.
Separately, fears surrounding GameStop's declining sales of video games and consoles are overblown. When GameStop reported second-quarter earnings results, the stock fell 10% in a single day, largely because same-store sales fell 11%.
Same-store sales is a metric frequently used to analyze retailers, as it measures sales at locations open at least one year. This was a far worse result than analysts expected. The leading contributor was a 33% decline in new video game hardware. Investors are panicking because of this, as it seems to suggest digital downloads are taking over, which would pose a serious threat to GameStop's lucrative trade-in business.
But there is more to this story. Gamers postponed buying new consoles and games last quarter because both Microsoft and Sony announced new generations of their flagship consoles. This should simply result in pent-up demand.
When it comes to video games, the company was victimized by difficult comparisons. The second quarter of 2016 lapped a highly successful second quarter last year, when titles such as Batman: Arkhman Knight and Elder Scrolls Online were released.
GameStop does have a significant digital business, which generated $32.7 million of gross profit for the company last quarter. In fact, GameStop's preowned business held up well last quarter, with sales declining just 3.2% year over year, a much better performance relative to the overall video game business.
Gamers have demonstrated a significant desire to trade in video games and consoles. This option at least gives gamers some cash in their pockets for used products, which they can use for something new. The option to trade in is eliminated with digital downloading.
Because of this, it is unlikely that digital downloads will displace traditional video games any time soon.
GameStop's financial performance looks weak, but the negative headlines do not tell the whole story. Unfavorable comparisons can make a company's results look worse than they really are. In a way, investors should view GameStop in a similar manner as Apple, in the sense that both companies are reliant on new hardware releases, which are set a few years apart.
In the meantime, steep declines in revenue are common, but temporary in nature.
The key takeaway is that GameStop is likely to see improved results from its core video game hardware and software over the next year, thanks to new consoles and new video games set for release on these new consoles.
And, the company is generating significant growth from new channels. To that end, over the first half of the year, more than 50% of the company's operating profit came from nonphysical gaming businesses.
Because of all these catalysts, GameStop could return to growth next year.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.