GameStop Corp. (GME) Stock Can’t Ride Nintendo (NTDOY) Switch Forever

GameStop Corp. (NYSE:GME) has struggled of late as video game delivery moves to an online/streaming model along with the rest of civilization. Year-to-date, shares have lost 10.6% of their value, while GME stock fell 21% over the past year.

GameStop Corp. (GME) Stock Can't Ride Nintendo (NTDOY) Switch Forever
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But GameStop shareholders witnessed a silver lining last week when GME reported earnings. Thanks to Nintendo Co. (OTCMKTS:NTDOY) and the release of its Switch console hybrid, GameStop returned to positive sales growth.

It wasn’t anything near enough to stop the bleeding from a stock perspective, though, and that speaks to why the Nintendo Switch can only help GME stock for so long.

How Nintendo Helped GME Stock

More specifically, total global sales for GameStop increased by 4% in the most recent quarter, thanks in part to 2.3% same-store sales growth — an expansion largely driven by international sales. Once again, the fattest number in the earnings report was new hardware sales, which grew 24.6% thanks to the Nintendo Switch.

The cool thing about the Switch is that users can use the console as a mobile gaming device or hook it up to their television. Combine that with the cult following of Legend of Zelda, and you have the recipe for one sizzling hot device. In fact, Nintendo hasn’t been able to keep up with demand for the Switch.

But for GameStop, a new Nintendo fad is little more than a loosely tied band-aid. In the past three quarters, software sales and pre-owned sales both continued to decline, dropping 8% and 6%, respectively, in Q1. Those two segments together make up more than half of GameStop’s sales, too, as hardware makes up less than 20% (the Switch is only a fraction of that).

Bottom Line on GME Stock

It’s not a great position to be a retailer totally reliant on other companies releasing smash products to post minimal growth. The headwinds are strong for GameStop, and reminiscent of the struggles of brick-and-mortar retailers of other kinds. Office Depot, anyone?

Just a quick look at forward expectations from GameStop confirms the skepticism. For the current three months, earnings are slated to be sliced by 40%, while the full-year contractions should be more than 12%. And while sales growth is expected to end in the black this year, it’s supposed to contract be about the same amount the year after. That’s hardly what I would call progress.

GameStop is trading for a PEG ratio right around 1 after the bloodbath, but I don’t feel particularly confident in a company that has to plug the holes left by its shrinking core business with hardware releases that look a lot like drawn-out fads.

Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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