GameStop has "at least 10 years of runway left" - Pachter

Wedbush analyst sees a longer tail for the leading retailer's core business despite the rise of digital

For years now, industry pundits have been predicting the death of video game retailers like GameStop. With The NPD Group continually showing retail sales declines in its monthly reports, the thinking is that digital distribution methods will eventually make GameStop - and its used business empire - all but irrelevant. In his latest investors' note, Wedbush Securities analyst Michael Pachter said it'll be a long time before that happens.

"We...think that GameStop has at least 10 years of runway left in its core business," Pachter noted, adding that GameStop is also benefitting from selling used devices, not just software.

"In the meantime, the company is leveraging its pre-eminent position in selling used game consoles into a strength in offering used smart phones, tablets and other consumer electronics, and we expect substantial growth from this category over the next several years. GameStop management has consistently returned the company's free cash flow to investors, and we expect them to continue to do so, suggesting to us that EPS growth will continue for much of the next decade."

Thanks to Microsoft reversing its always-online and used games policies for the upcoming Xbox One, the next round of game consoles should be fairly kind to GameStop's pre-owned business.

"With the status quo remaining largely in place for used gaming on next gen, the transition of sales from physical to digital should be quite slow," Pachter said. "GameStop's PowerUp Rewards program should enable continued market share gains and position it to be the 'last man standing' for physical sales."

There are some in the industry who also think that retail will always have some significance to the market, even if digital does become the predominant purchase method by which to acquire games. Ubisoft's VP of digital publishing Chris Early commented to GamesIndustry International recently, "Maybe the store experience will morph. Maybe you'll see more of an Apple-type experience store where you're able to do things, but I don't think it'll go completely away."

GameStop will report its second-quarter earnings on August 22. Wedbush has assigned the company an "outperform" rating and a 12-month target of $49.

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Latest comments (7)

Steve Goldman Journalist. 6 years ago
Gamestop I think has 20+ years left if they go retro
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Asif A. Khan, CPA Financial Reporter 6 years ago
Just how much upside is left to the stock? Wedbush has a $49/share 12 month price target and shares are trading north of $47 right now. Seems like an odd time to opine about a 10 year story for a company that clearly is going to face a lot of headwinds going forward, especially with the stock trading so close to the target price of the firm. I think Wall Street views GME as the stock to own to play the next generation console launches this winter, but will GameStop really be worth $5.88 Billion after the dust clears? It faces competition from Walmart, Best Buy, and Amazon on the retail side and a secular shift towards DLC that is only going to gain momentum over the next ten years. The one factor that has helped to propel GameStop's stock higher is the 25% short interest in the shares. A lot of investors were caught flatfooted betting against them and have paid the price. In an increasingly competitive environment, I am not sure if this 10 year runway Mr. Pachter speaks of will lead GameStop anywhere other than a fiery wreckage.
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Caleb Hale Journalist 6 years ago
The blow-back over Xbox One's initial DRM policies and the hand wringing over PlayStation 4 maintaining a use games feature set shows the gaming public isn't ready to embrace the digital shift just yet. And like readers and books, there is going to be a certain population that's never ready to give up hard copies.

While it's almost a sport among gamers to hate GameStop, it seems everyone ultimately finds their business practices a necessary evil that helps fund their continuing gaming habits. Despite the games media's pacing of hyping the latest game releases, it's a fact of economics not every gamer is ready to jump on that latest release as soon as it drops.

Aside from the rage Microsoft would have endured had it kept its DRM policies in place, I think the rate of new game purchases even among the Xbox faithful would have suffered, simply because the practice of selling back used games would have been more difficult. Physical copies are just more versatile for the common buyer. You have to be a pretty astute follower of gaming deals to catch breaks on digital content.
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Greg Wilcox Creator, Destroy All Fanboys! 6 years ago
@Caleb: That and hell, GS isn't the ONLY place to buy retail games in the US - just the most popular (and most despised to some)...
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Shane Sweeney Academic 6 years ago
I don't know about the rest of the world. But in Melbourne every bookshop has essentially closed down. Our massive publicly traded companies that have existed forever domestically have just closed down.

We have two types of book shops remaining, really awful book shops called "All Books 4 Less" that are popping up everywhere selling terrible books for $5 or $10 catering to the gifts market. (Book are great gifts!)

And a hand full of specialty book shops that focus on specific areas topics, the eco system of book shops don't like to treat on each others toes. You have the Logic/Science/Maths/Digital culture book shop. The art/photography/travel book shop etc. The soft core porn, drug, and political bookshop. They all coexist together and attract a small niche following.

Physical video game stores will always exist but I imagine having a publicly traded massive entity that franchises on every street corner in every major city is definitely ending. I welcome the return to a small number of boutique game shops like the early 90's had.

I definitely prefer today's bookshops in Melbourne then I did a decade a go.
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Paul Jace Merchandiser 6 years ago
For years now, industry pundits have been predicting the death of video game retailers like GameStop.
Yeah but you can replace "video game retailers" with"PC gaming" or even "Nintendo" and the arguments all hold the same amount of weight. None of them are going anywhere, atleast not anytime soon.

Edited 1 times. Last edit by Paul Jace on 19th August 2013 7:06am

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From Wedbush, who also declared Zynga: "Outperform" and "Zynga is well run, better than it's rivals".

So, consider the source.
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