GameStop On the Go

The video-game retailer may be the way to play the new console wars.
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Forget

Sony

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,

Nintendo

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and

Microsoft

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.

The real winner in the ongoing console war is likely to be

GameStop

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, which has seen its stock soar 60% in the past year, and some 25% in the last three months.

Whichever way the console war turns, this video-game retailer wins, and that could make it a very attractive buy for long-term investors who don't want to experience the nervousness associated with the fluctuating fortunes of console makers and game developers.

Strong growth in sales for the next two years or more, a focus on cost savings and better margins are the main contributors to the stock's attractiveness.

"GameStop is a very safe way to play the games cycle," says Michael Pachter, an analyst with Wedbush Morgan Securities. "You don't care which console succeeds or which game does well. You just care that people are buying games." Wedbush Morgan does not own shares or have a banking relationship with GameStop.

Grapevine, Texas-based GameStop's $1.4 billion merger with rival Electronics Boutique in April 2005 has turned the company into the largest video-game retailer with 4,633 stores worldwide.

That deal may be paying off now, not just in terms of adding operational efficiencies, but giving the company the scale it needs to beat rivals, since retailers' supply of the in-demand new consoles is largely based on market share.

For instance, GameStop will get 25% to 30% of the scarce Sony PlayStation 3 supplies in North America because of the company's clout in the business.

Investors got a taste of the company's value proposition on Tuesday. Shares of GameStop were up 4% on Tuesday

after the company announced an 89% rise in revenue to $1.01 billion from $534.2 million in the prior-year quarter.

"It's really surprising that the market for the stock is so strong after earnings because the history of the company is such that the stock goes down when earnings are in-line and there's no raise in guidance," says Pachter.

One reason could be the stock's attractiveness as a safe bet for those wanting to capture momentum from the next-generation game cycle. Much of GameStop's revenue in the fourth quarter and later will come from new consoles, Sony's PS3 and Nintendo's Wii.

But the company's third-quarter results also showed that while GameStop needs the new consoles to drive growth, it already has a reliable stream of revenue from older systems.

GameStop posted a 69% increase in hardware sales with five to six hardware units selling well. The company continues to do well with Microsoft's 360, Nintendo's DS Lite, the Sony PS2, which is well into its seventh year, and the PlayStation Portable, it said.

"Gamestop does not have to worry about one console or another," says Dan Ahrens, portfolio manager at the Gaming and Casino Fund which hold shares in GameStop, Electronic Arts, Activision and Take Two. "They are less concerned with selling one console over another than repeat and actual game sales."

And it's not just consoles that are getting consumers' attention. Add-ons, accessories and upgrades including memory cards, marketplace points, Wii point cards, HD DVD addition and wireless headsets are selling well.

Sure, GameStop faces strong competition from electronics retailers like

Best Buy

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, but for hardcore gamers, GameStop is the place to go. GameStop's main audience is in the 13- to 18-year-old bracket, much younger than Best Buy's 18- to 45-year-old demographic.

The young consumer base has helped GameStop get an advantage over diversified electronics retailers by creating a very active and profitable used-games business. GameStop posted $315.7 million in gross profit in the third quarter, of which, nearly 48% comes from sales of used games.

"It's a huge category and something that companies like Best Buy can't build easily," says Pachter.

Still, in the near term, GameStop is unlikely to blow numbers away. Also, the stock is trading at more than 20 times next year's consensus numbers, which is a fairly high valuation for the company, says Pachter.

However, GameStop's position makes it an attractive buy, says Ahrens. "I think it's a good long-term buy because so many good things happening in the industry and any volatility in the stock creates new buying opportunities," he says.

Where GameStop could stumble is in its strategy of opening new stores. The company said it will open 600 new stores next year, a majority of which are likely to be in the U.S.

Instead, says Pachter, it needs to look at Europe, which is a fast-growing market. "They have an opportunity in Europe, and they are slow to exploit it," he says. "The games market in the U.S is somewhat limited, and if they wait too long in the cycle, they will miss it in Europe."