Analyst: GameStop’s Core Game Business Is Positioned for Growth

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

On Tuesday, GameStop (NYSE:GME) held its Analyst Day in Dallas. The day consisted of tours of the company’s Refurbishment Operations Center (ROC), its new prepaid mobile concept, a Simply Mac store, and a GameStop store. Management made several presentations on each of these concepts, plus Spring Mobile, and outlined the company’s growth strategy.

We see synergies between GameStop’s buy-sell-trade model and its entry into technology retail. We see significant potential for the company’s expansion into prepaid mobile, as we believe that the new stores provide a logical outlet for its growing inventory of used smartphones. We see less synergy from the Spring Mobile concept, but acknowledge that GameStop’s growing presence in the buy-sell-trade of mobile phones and tablets is positioned to gain from a steady supply of trade-ins from the Spring Mobile new phone business. We see the least synergy from Simply Mac, which we think is an interesting concept, but it has far less in common with GameStop’s core business than the other two.

The company’s core game business appears to us to be in fine shape and positioned for growth. GameStop’s management shares our view that video game software sales will once again begin to grow later this year, and GameStop appears positioned to continue to gain market share as its used game business provides value to its customers that is difficult to replicate. We expect free cash flow from GameStop’s core game business to grow, and expect the company to fund the expansion of its Simply Mac and prepaid and post-paid mobile retail stores from free cash flow.

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