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Despite A 10% Plunge, GameStop Showed Signs Its Long-Term Plan Is Working

Gamestop Corporation NYSE:GME - Despite A 10% Plunge, GameStop Showed Signs Its Long-Term Plan Is Working

The bearish case against owning GameStop Corp. GME 10.45% has been well communicated to the market. The company is a retailer of physical hardware and video games that consumers can easily purchase online or download directly through their console.

GameStop's stock plunged more than 10 percent on Friday as investors were clearly disappointed with the company's reported 10.6 percent decline in second-quarter comparable sales. As such, the bearish thesis gained validity and the bullish case is now put into question.

However, according to Bloomberg Gadfly's Shelly Banjo, GameStop's strategy of diversifying its business beyond physical games is actually showing signs of early success.

GameStop said that it plans on generating half of its total operating earnings from initiatives outside of physical games by 2020. For example, the company is focusing on exclusive video game related collectibles and selling products through its 72 Simply Mac and 1,400 Sprint Mobile specialty stores.

Related Link: Unexpected Decline In Hardware Sales Led GameStop To Mixed Q2 Results; Baird Says Buy On Pullback

Banjo noted that during the second quarter, sales from mobile and consumer electronic initiatives rose to 13 percent of its total revenue, up from 10 percent in the prior quarter. In addition, revenue from the technology segment rose 55 percent year-over-year and contributed 24 percent of its overall earnings.

There is however one problem. Global phone sales are expected to fall 7.7 percent to around $95 billion in the second quarter, and the average selling price dipped 8 percent from a year ago. As such, it would be wise for management to "reconsider how big of a phone-seller it wants to become."

Banjo noted that GameStop may be aware of the trend, as management suggested that it could be a partner with major film studies and also go out and purchase new retail businesses.

"The company realizes its legacy business is in decline and is actually doing something about it," Banjo wrote.

At time of writing, GameStop was trading at $28.78, down 10.56 percent with about an hour left of trading in the regular session.

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DateFirmActionFromTo
Aug 2016BairdMaintainsOutperform
Jul 2016Bank of AmericaUpgradesNeutralBuy
Mar 2016Credit SuisseMaintainsNeutral

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