GameStop Earnings Preview: Expect Digital Products, Retail & Technology Brands To Drive Q1 Growth

GameStop Inc. (NYSE:GME) is scheduled to post its Q1 results on May 31. The changing landscape in the gaming industry, with companies focusing more on digital sales compared to hardware sales, has negatively impacted the company’s performance. While the new hardware sales picked up in 2017, due to the launch of Nintendo Switch, the company saw a decline in sales of other consoles. This trend is likely to continue, and impact both the company’s top line and bottom line performance in its Q1 results. We have created an interactive dashboard analysis on GameStop’s expected performance for 2018. You can adjust the revenue and margin drivers to see the impact on the company’s performance. Below we discuss our expectations and forecasts for the company.

Expect New Video Games Hardware & Software To Decline

We estimate GameStop’s New Video Games Hardware sales to decline 15% to $1.52 billion in 2018. The overall industry hardware sales were up a solid 28% (y-o-y) to $4.71 billion in 2017, benefiting from launch of new consoles, primarily Nintendo Switch. The sales will likely cool in 2018, thereby impacting GameStop’s New Video Games Hardware segment.

We don’t expect such a decline in other segments. The New Video Games Software segment will likely see a mid-single digit decline in 2018, as there will be demand for games for new consoles. Also, there are a lot of sequels lined up for release, including Red Dead Redemption 2, Super Smash Bros., and Kingdom Hearts 3 in 2018. However, it may be difficult to match the overall sales generated in 2017, which benefited from blockbuster games, such as Nintendo’s Zelda: Breath of the Wild. 

GameStop’s Digital Products, Retail & Technology Brands will likely continue to see steady growth in 2018. The company offers digital downloadable content (DLC) on the day of launch, which aids its overall segment sales. The company has also built up long standing relationships with publishers which allow it to maximize its offerings. This has aided the segment revenue growth in the recent years, and we expect this trend to continue in the near term. Also, GameStop has been diversifying its business portfolio by acquiring technology brand stores to cater to a larger audience with different needs. The company operates a number of tech brand stores selling non-game electronics such as mobile phones and Apple devices, as well as pop culture collectibles. The segment has been performing well and we expect that to continue, primarily due to strong sales of non-game electronics.

We currently forecast GameStop’s earnings of $3.13 per share in 2018, and a price to earnings multiple of 6x, which translates into a price estimate of $19, which is much higher than the current market price of around $13.