Video Game Sales Strong

| November 17, 2008 | 0 Comments

The easiest money I ever made was a $100 bucks from a sweepstakes on a box of Cap’n Crunch cereal.  I was only 10 years old.  The check showed up decorated with a colorful picture of the Cap’n.  It looked so hokey I had to convince my mom it was real.  Eventually she gave in and drove me to the bank.  Probably more to shut me up than actually believing it was real.

I walked out $100 richer.

With $100 burning a hole in my pocket, I had to have a Nintendo game system.  It was a great purchase.  I was pumped up to take home some cheap entertainment.  It sure beat dropping quarters into an arcade game.

The old technology is a far cry from what’s available today.  The concepts are the same.  Games take you to new worlds where you’re a hero or villain… depending on what suits you.

It’s not just kids turning to video games for entertainment. 

The world economy is heading into a prolonged recession.  Rising unemployment, home values tanking, and stock portfolios… let’s not even go there.  All of this bad news makes me want to head for a new world. But since commercial space flight is still a few years away, I’ll choose a video game to take me there today.

I’m not the only one choosing video games.  There’s an explosion in video game play – also called “gaming”.  Despite the bad economy, video game sales are up 32% this past year.

There’s an entire generation of “gamers” that grew up playing video games.  They may be older but they haven’t quit buying video games. Why?  Video games offer days of entertainment.  Similar forms of entertainment, like movies, give you about two hours.

Did you know video games sales and revenues grew in past recessions?

We’re already seeing the crunch in consumer spending hurt retailers.  It’s bad news for those selling new game systems.  But the three major video game makers all rolled out new systems in the past few years – Nintendo’s Wii, Microsoft’s X-Box 360, and Sony’s Playstation 3.

There’s a video game system in 41% of American homes.

Video games are completely integrated into cultures around the world.  All of these gamers are trying to figure out where they’ll get the most bang for their entertainment buck.

One video game retailer has a “secret weapon”.

It keeps their customers coming back.  Their revenues are growing at nearly 35%.  Not too bad considering the rest of the industry has revenue growth of around 10%.

Here’s their secret weapon… a video game loses all value to a “gamer” when they’re finished.  They’re ready to move on to something else. Seeing an opportunity, this retailer offers $5 in store credit for the used game.

Then the store turns around and sells it at a discount to the new version of the same game.  Some used games sell for as much as $50 (now that’s a profit).

Used games are a huge and growing part of their business.  In fact, they have the largest inventory of used games in the industry.  The profits on these sales go straight to their bottom line.

Who’s this successful company?  GameStop.

GameStop (GME) is the world’s largest video game retailer.  With over 5,557 stores in 17 countries (they just added an 18th country and 332 more stores with a purchase of France’s largest retailer), they are the biggest by far.

Their secret weapon drives 90% profit margins on used games.

Used games are the cheapest way to pick up a Christmas present for the gamer on your list.  Add in a few blockbuster game releases timed for the holidays… and Gamestop’s profits are set to explode.  I’d expect its stock price is going with it.

Video game sales have weathered this recession well.  But take a look at the stock price and you’ll see it’s down about 32%.  This stock’s been unfairly lumped in with all consumer discretionary stocks.

Gamestop will announce 3rd quarter 2008 earnings on November 20th.  If they meet current estimates, look for a quick bounce back from its recent lows.

If you can handle some short-term volatility, Gamestop should make a great rally at the end of this year and the beginning of ’09.  Longer term I see this stock retesting its 52 week high of over $63.

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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