FORBES ARTICLE: The Best Places To Put Your Money Today (They say it is GME)
go to forbes(dotcom) /sites/wallaceforbes/2014/04/02/the-best-places-to-put-your-money-today/2/
Paul: In the same vein, I’d also like to highlight GameStop Corp. (NYSE: GME), a retailer of video games and a much smaller company than HP. The big fear here is that video games are the next domino to fall in the digitization of media. Record stores are gone, and bookstores are headed on the same path. It’s only a matter of time before we lose all the video game stores. Or so the story goes. But we think these fears are overblown, for a couple of reasons. First, GameStop is an extremely conservatively run business. It has no debt. The average lease length on its stores is three years or less. Its stores aren’t filled with expensive fixtures; it’s a lean operation. Management runs the business for cash flow, and has been quite good about returning that cash to shareholders in the form of dividends and share repurchases.
Second, we also think the business has more staying power than is generally perceived. GameStop’s core customers are young men between the ages of 15 and 24. They need to be able to trade in their used games in order to buy the new games, and GameStop has tremendous depth and experience in managing inventory and refurbishment of used games. That has created an extremely loyal customer base, which has proved a strong barrier to the digital delivery of games.
In fact, in this new game cycle — where Microsoft and Sony have brought new consoles to market — we saw a bit of a prisoner’s dilemma take place. Microsoft released its new Xbox first, declaring that it wouldn’t allow used games to be played on the new console. Sony promptly responded with the opposite message, because that’s what the customer wants. Ultimately, Microsoft had to backtrack. We viewed this about-face as stark evidence that the ecosystem around this market will be preserved much longer than many people now fear.
Forbes: So it’s not necessarily a short-term opportunity, but you think GameStop can survive even if you think the game shops are headed out?
Paul: I think that it will survive. More important, two new video game consoles were released this past holiday season: a new Xbox and a new PlayStation. New releases have historically been followed by a huge wave of game sales. We expect a substantial ramp-up in profits and cash flow over the next several years.