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Investment Overview for GameStop (NYSE:GME)
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Below are the key drivers of value that present opportunities for upside or downside to the current ${trefisprice}.
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Used Video Game Products Revenue Per Square Foot
Used video game products revenue per square foot has increased from $218 in 2008 to $280 in 2011. The increase has been primarily due to increased promotional efforts using PowerUp Rewards program and changes in merchandising.
We expect the used video game products revenue per square foot to decrease steadily and reach $174 by the end of the Trefis forecast period.
The penetration of used video game products in international markets is relatively low and GameStop is banking on international expansion in the used video game space to drive its revenues. There could be an upside of 10% to the Trefis price estimate of GameStop's stock if the used video game revenue per square foot reaches $226 by the end of the Trefis forecast period.
On the other hand, used video game products face substantial threats from the shift in the gaming landscape from retail to digital. If video games shift to purely digital form, then the concept of used games will no longer be relevant. A decrease in the used video game products revenue per square foot to $123 by the end of the Trefis forecast period may lead to a downside of 10% to the Trefis price estimate.
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GameStop's Digital Revenues
GameStop’s digital revenues have increased aggressively over the past two years to reach $453 million by the end of 2011.
Growth in DLC revenues, acquisition of popular online gaming site Kongregate and PC game distribution platform Impulse are expected to bolster GameStop's digital revenues. An increase in digital revenues to $1,250 million by the end of the Trefis forecast period will lead to a 5% upside to the Trefis price estimate.
However, as gaming developers start providing more of their games directly to users and as competition from Steam, the market leader in PC distribution, increases, there could be a negative impact to the growth rate of GameStop's digital revenues. A decline in the digital revenues to $764 million by the end of the forecast period will lead to a downside of 5% to the Trefis price estimate.
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GameStop is the world's largest multichannel retailer of video game products and PC entertainment software. It sells new and used video game hardware, video game software and accessories, as well as PC entertainment software and other merchandise. The company operates 6,683 stores in the United States, Australia, Canada and Europe, under the names GameStop, EB Games and Micromania.
Since 2009 GameStop has changed its strategy from entirely retail to a hybrid of retail and digital. GameStop offers downloadable content(DLC) for video games, digitally downloadable PC games and digital currency for console gaming networks as well as browser based gaming. It also offers a digital edition of the Game Informer magazine as well as online gaming through Kongregate.com.
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Growing digital business
GameStop reported a growth of 61% in its digital revenues from 2009 to 2011 and is expected to grow significantly in the future. The digital business will drive the Retail PC & Digital Sales division
High gross profit margin in used video game products
GameStop earns very high margins from sales of used video games. In 2011 the profit from this division accounted for 45% of company's gross profits. Gross margins for the Used Video Game Products division was 46.6% in 2011, the highest among all of the company's divisions.
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Gaming landscape shifting from retail to digital
The video gaming industry has been shifting from retail to digital for the past few years. A growing number of games are now being published digitally. Casual browser based gaming and mobile gaming have become a significant part of gaming revenues and are expected to continue to increase in the future.
GameStop has also changed its strategy to focus its sales on a mix of retail and digital gaming products. The
recent strategic acquisitions of several digital properties such as Impulse, Spawn and Kongregate reinforce the former point.
Forecasts are cyclical in nature and depend on the launch of new gaming consoles
The video gaming industry is cyclical in nature and depends heavily on the launches of new gaming hardware platforms. Sales of new video gaming hardware typically pick up in the first year of the console launch.
Margins are higher for older platforms' games
Used Video Game Products Gross Profit Margin depends on the age of the video game products. GameStop profits more games from older platforms vs. used games for current platforms.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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