Investor sentiment surrounding GameStop Corp. (NYSE:GME) has turned around sharply in the past few months. GME stock plummeted to about $20 and change after the company reported disappointing Q4 results in late March. Investors used that sell-off as a buying opportunity, after all, the 2017 growth story remained little changed. GameStop was still set to benefit from an exciting 2017 console upgrade cycle headed by the Nintendo Switch, PlayStation VR and Xbox Scorpio.
GME stock surged to nearly $25, recouping all of its post-Q4 losses by early May. But the stock has stumbled recently, with the biggest driver being a decision by Take Two Interactive Software Inc (NASDAQ:TTWO) to delay a big game by roughly 6 months (Red Dead Redemption 2).
GME stock now languishes below $23, and is almost 10% off its early May highs.
I think this recent weakness is a buying opportunity, especially with an earnings catalyst on the horizon.
Here’s why.
GameStop and Video Games Are on Fire
The story of GameStop this quarter may as well be the story of Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY).
Nintendo’s newest gaming console, the Switch, has been absolutely on fire. At first, it was just speculation as GME management said the Switch is so popular that it will be “chasing supply” all year.
But that speculation has materialized into hard data, and that is changing the entire outlook on the video game industry. After 9 months of declines, video game sales soared 24% in March, with Switch leading the resurgence. That data was backed up by bullish commentary from Target Corporation (NYSE:TGT), where management said that the launch of the Nintendo Switch served as a huge tailwind for their video game business last quarter.
The most obvious winner here: GME stock. As the go-to retailer for video games, GameStop figures to be the go-to retailer for red-hot Switch video games.
From this standpoint alone, I think GME’s quarter was quite good.
But there is also a longer-term story at play here. Nintendo Switch is just the first in a series of new-generation gaming consoles (PlayStation VR and Xbox Scorpio) that are changing the videogame landscape. As AR/VR enhancements become more regularly integrated into gaming consoles, the video game industry’s long-term outlook grows rosier.
GameStop also has Tech Brands and Collectibles. These are GME’s lesser-know, hyper-growth alternative retail concepts that should help offset software declines. The Tech Brands business, which sells smartphone-oriented products and services, is perfectly positioned to grow for multiple years as the mobile shift continues. Meanwhile, the Collectibles business, which sells toys and miniatures, has an equally promising growth outlook. While you can download games, you can’t really download physical toys.
Bottom Line on GME Stock
Right now, the stock is selling off due to the delay of Red Dead Redemption 2, but that is a buying opportunity.
If the Nintendo Switch is a sign of things to come, then GME stock has a really bright future.
GameStop stock is cheap, the yield is high, the financial results are stabilizing, and there are material product catalysts on the horizon. I like that set-up, and especially think this stock could fly higher on a good Q1 report.
As of this writing, Luke Lango was long TTWO and GME.
