Will Digital Sales Crash GME Stock?

GameStop (GME) got a power-up after last quarter’s earnings report. GME stock jumped almost 10% after GameStop earnings beat estimates and and the company boosted its Q4 forecast.

gme-stock-gamestop-earningsIn fact, GME stock has gained more than 15% in the past three months — nearly double the S&P 500 in that time. GME has been riding the wave of relief after Microsoft (MSFT) reversed its “no used games” policy for the Xbox One, which could have been a death blow for the company. But with used games back on the table, investors have been pushing GameStop stock higher.

Heck, since Jan. 1, GME stock has soared nearly 120%.

So what should GME stock investors expect from the Wednesday’s GameStop earnings report? Well, not too much.

GME Stock Running Out of One-Ups

GameStop earnings are expected to come in at 57 cents per share, slightly above the range of 50-55 cents that GME gave during its last earnings report. Revenues for GME are expected to come in at $1.98 billion, which would represent a year-over-year increase of 11.8%.

Again, GME boosted expectations when it reported earnings last quarter, so investors are expecting a good show from GameStop earnings. And the $1 billion launch of Grand Theft Auto V should help.

But there are a few reasons for GME stock investors to be concerned.

The gaming industry is buzzing with the news of recent launches. Call of Duty: Ghosts was released earlier this month and, though the exact numbers haven’t been released, the game almost certainly made hundreds of millions in sales. (The previous two entries sold $400 million or more at launch.) And, according to initial figures, PlayStation 4 units have been selling out all over the country in its first weekend of release.

But here’s the thing: GameStop earnings are for the period through Nov. 2 — which means sales of Ghosts and PS4s aren’t going to be included in the GME numbers. Sure, there’s still GTAV, but that’s old news at this point.

On top of that, the biggest point of concern for GameStop stock investors is a trend that Take Two Interactive (TTWO), the publisher of GTAV, illuminated in its own earnings report.

In Q2 2012, 80% of game sales for TTWO were physical copies sold through retailers like GameStop and Amazon (AMZN) … and only 20% of sales were digital. Just a year later, sales of physical copies plummeted to 40%, while digital sales surged to 60%.

That’s terrible news for GameStop, and GME stock investors.

Sure, the company makes higher margins on used game sales than sales of new games … but that business model won’t keep GME stock afloat when there are no physical copies of used games for GameStop to sell.

This change won’t happen overnight, obviously, but the trend is obvious. That throws an enormous hurdle in front of GME. The company dodged a bullet when Xbox reversed its used games policy, but what can GME do to stop broader consumer preferences?

The bottom line: There’s been a lot of exciting news about the video game industry lately. But don’t expect it to show up on the GameStop earnings report — and don’t expect GME stock to keep soaring.

Adam Benjamin is an Assistant Editor at InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2013/11/gme-stock/.

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