This Won't End Well for Gamestop

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When it comes to investing into GameStop (NYSE: GME), investors have to think that there is just way more downside than upside in the company.

In a previous article, I mentioned that the stock was going to report a substantial decrease in earnings because of digital sales of content on the next generation PlayStation 4 and XBox One consoles. Since the release of the article, (May 15) the stock has declined by 15%. The decline of the stock should continue as the company’s online retail strategy is unlikely to be any better than operating full blown retail stores.

How to trade GameStop

When I think of GameStop, I think of a business that is becoming a bit of a legacy. Selling video games in the retail format increases the cost for content producers and hinders creativity. GameStop became an added cost, which both Sony (NYSE: SNE) and Microsoft (NASDAQ: MSFT) had to let go.

Sony anticipates that, in fiscal year 2013, console shipments of PlayStation 3 will decline from 10 million to 5 million. The decline in shipments may imply the amount of revenue that GameStop will be able to generate from the console could be reduced by half. Over time, the number of PlayStation 3 users will decline as they upgrade their console systems. GameStop will have to rely on the sales of used games for XBox 360, and PlayStation 3 meaning that the business is undoubtedly heading towards one trajectory, which is downwards.

Hedge fund analyst Josh Burwick added to the negativity surrounding the stock by stating that shorting the stock could bring a 50% return.

Stronger opportunities in Sony

I believe that Sony should merit an investment opportunity. In an environment of declining Japanese yen values, the stock should be able to report inflated earnings. However, there is a limit to this strategy, so I’m not basing my optimism on currency fluctuations alone.

Sony’s release of its new Sony Xperia ZL has been the cornerstone to turning the company’s earnings around. The mobile segment was able to grow by 81.5% year-over-year in the most recent quarter. Sony’s financial arm, Sony Bank, was able to grow earnings by 18.6% year-over-year in the most recent quarter.

The company grew earnings in its mobile division, which is the primary reason investors should consider an investment into the company. There are many Sony brand loyalists in the world left. However, consumers weren’t given a very compelling phone offering, especially not in the United States. Now Android users can enjoy their favorite operating system from their favorite brand.

Sony also outshines at distribution in the Asia Pacific region, and this is the selling point of the company. The market for smartphones is only in the beginning stages of growth. IDC estimates that the smart phone market will double between 202 and 2016 to 1.4 billion units. Sony will get a small piece of the action which will still mean large returns on investment for the company and the shareholders.

 Microsoft is so good at making money

I have to admit I am a massive fan of Microsoft and its current strategy with the next generation consoles. The company is on track for growth as its consumer electronics and entertainment division was able to grow revenues by 56% year-over-year in Microsoft’s most recent quarter. The company’s growth in the recent quarter was driven by video game sales, increases in Microsoft XBox live subscriptions, and Xbox 360 sales.

After kicking GameStop out of the distribution system I anticipate that Microsoft will earn additional revenue from video game sales. Getting rid of used game sales will optimize the profitability of firms. Consumers will no longer have the option of recycling video games by selling used games to one another.

Conclusion

Investors should definitely steer clear of GameStop. In fact, shorting GameStop then going long Sony and Microsoft could be the best non-directional bet on earth.

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunity is huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


Alexander Cho has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure