Video gaming retailer GameStop (NYSE:GME) has ceased taking pre-orders of the Wii U deluxe. [1] Additionally, seeing the current customer response, the reserves on Wii U basic bundle are also expected to fill shortly. While the news may be encouraging considering the past declines in hardware consoles sales, we believe, even bumper sales of Wii U consoles will hardly add to GameStop’s net value.
Below we do a situational analysis with the help of Trefis interactive charts to see what can be the potential impact of higher than expected Wii U sales on GameStop’s value. GameStop is a leading retailer of new and used video-gaming products competing with the likes of Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY) and Amazon (NASDAQ:AMZN).
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Impact of higher than expected Wii U console sales on GameStop
The new video gaming hardware business contributes a meager 5% to the Trefis price estimate for GameStop’s stock. While the business segment has contributed roughly 16-20% to GameStop’s net sales over the past years, low gross margins in the range 6-8% make the new video gaming hardware business the least impactful of all of GameStop’s business segments.
We forecast GameStop’s ‘New video game hardware revenue per square foot‘ to decline from $172 in 2011 to $167 in 2012, based on the six-month trends of the current fiscal year. Let’s say that GameStop manages to sustain the initial customer reception for the Wii U pre-orders until the release of Wii U in North America in November 2012. If the divisional revenue per square foot increases by 10% in 2012, which is a highly distant probability considering the simultaneous declines in Microsoft XBox 360 and Sony PS3 sales, the Trefis price estimate increases moves less than 1% demonstrating how the inconsequential Wii U sales are on GameStop’s net value.
Now one can always argue that these hardware sales will eventually translate into new software sales, a business segment that contributes nearly 29% to GameStop’s stock. However, in an age of rapidly transforming video-gaming landscape from retail towards digital, this statement will be far too early to confirm.
As developers try to reach consumers directly, thereby skipping midway retailers such as GameStop, the concept of a direct relationship between hardware and software sales for a video-gaming retailer is in doubt.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- GameStop has sold out Wii U deluxe pre-orders, Source: Polygon [↩]
