Is It Time to Sell Those GameStop Shares?

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

New information was leaked this week about the new Xbox console. It's been called Durango and the Xbox 720. Either way, this week's leaks make it look as though the console will always be connected to the internet and that games can be installed, but not playable, from the disc, which is a not-so-thinly-disguised code for "no used games." 

When Sony unveiled plans for the PlayStation 4 earlier this year, they quietly sidestepped the issue of used games, but many people in the industry, after looking at the specs, have postulated that Sony was waiting to see what Microsoft would do, so that they could effectively fall in line to kill off or keep the used game market. 

The Wii U, which Nintendo released late last year, still allows gamers to play used games on their console. Will the ability to play used games give the Wii U the boost it needs to finally outsell the competition? Only time will tell, but I have a hard time believing that GameStop could stay alive in a market where it could only sell used games for Wii U and previous generation Xbox and PlayStation consoles. After all, GameStop makes it's real money in the used market, where it enjoys 100% of the profits, as opposed to the new game market, where it reaps a much smaller percentage. 

Lets look at the players in this drama.

Microsoft (NASDAQ: MSFT)

For the last three years, Microsoft's stock prices have been hovering around the $30.00 mark, but a new Xbox on the horizon might be just what the company needs to boost sales and excite investors again. With a market cap of $236.34 billion, and a price earnings ratio of 15.50, Microsoft remains a strong company, but they aren't just in the game console business. Pressures in other markets complicate the overall picture for Microsoft. If I already owned stock in Microsoft, I'd be inclined to hold it, certainly through the release of the new Xbox, but I'm not sure I'd buy now, not with the lackluster sales of Windows 8 and all the pressure from Google.

Sony (NYSE: SNE)

Like Microsoft, Sony isn't just in the game console business. Sony has stiff competition on all sides and stock prices have generally trended downward for the last few years. Sony has been trending up for the last few months, which may be due to excitement surrounding the new PlayStation 4. Whether that excitement can carry through to the actual release of the console is anyone's guess, but with a market cap of $17.39 billion, and a price earnings ratio that isn't being reported, I'm worried about Sony. With rival Samsung beating them on so many fronts, I'm not sure the PlayStation 4 is enough to ever pull their stock prices back up to where they used to be.

Nintendo (NASDAQOTH: NTDOY.PK)

With stock prices on a steady decline since 2009, it's hard to get excited about Nintendo. On the other hand, since the Wii U will be on equal graphics footing with the new PlayStation 4 and the new Xbox, it's conceivable that gamers will migrate in that direction if they can't play used games on the other new consoles. A migration like that could do amazing things for Nintendo, but I'm not sure Nintendo is ready for it. They don't have the same contracts with third party content developers that Sony and Microsoft do. The number of games out for the Wii U is still fairly small, which isn't unusual in a console's first year, but if you look at the games currently available for the Wii U, there aren't a lot of blockbuster titles on that list. There hasn't really been a big breakout game for the Wii U yet. Nintendo needs a Wii U game that players are clamoring for, but as yet, it hasn't appeared. Despite a market cap of $14.12 billion, the price earnings ratio of 56.45 makes me nervous that they're really overvalued. Nintendo is the only console manufacturer that is solely in the game market, and that makes me worry about their ability to move in new directions and grab gamers away from Sony and Microsoft.

GameStop  (NYSE: GME)

With a market cap of just $3.1 billion, and a price earnings ratio that, like Sony's, isn't being listed, GameStop is the small player in this console drama, and the one that's most likely to be crushed. GameStop's business model is heavily based on the used game market and it very much looks like that market is going to disappear. Couple that with the fact that GameStop's stock chart for the last five years looks a lot like a roller coaster, if you're holding GameStop, now might be a good time to start watching it closely to best gauge what you want to do and when you want to do it.

Conclusion

The console war is just heating up, but no matter how the war goes, it doesn't look like the used game market is going to be around for long. Sure, the prospect of losing the used game option might make some gamers hold on to their legacy consoles longer, but inevitably, people want the new systems and the new games. Television, movies and books have all paved the way for digital downloads, and the gradual disappearance of the used market. These new consoles are just one more step down that inevitable path.


Marie Flanigan has no position in any stocks mentioned. The Motley Fool recommends Nintendo. 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!

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