GameStop (GME) is up almost 17% year to date and the company reports results tonight after the close. I think the stock could go higher, since 2015's second half is packed with a strong slate of new releases.
GameStop reported disappointing earnings back in March. The company missed the consensus estimate by $0.25 a share and the stock took a beating. Management gave overly conservative guidance, which forced many investors to the sidelines. The shares have flopped around like a dead fish ever since, as nobody knows what to do with the stock.
Now, GameStop is expected to report first-quarter fiscal 2016 sales of $2.013 billion and $0.59 a share. Management told investors to anticipate same store sales between 1% and 6%. I think the company can comp to the high end, simply because Mortal Kombat X and Battlefield Hardline were huge hits during the quarter.
According to series co-creator Ed Boon, MK enjoyed its biggest launch in the franchise's history. NPD research said console software increased 20% and overall video-game software grew 13% compared to last April. Those kinds of figures give me confidence that GameStop should be able to beat the consensus estimate and possibly raise second-half guidance.
Regardless of where the quarter comes in, I think investors will begin to buy the stock ahead of the holidays because 2015's second half has a strong slate of new releases. For example, GameStop will release Madden 2016 in August and FIFA Soccer in September. While sports will be strong over the summer, October will see the release of Halo 5: Guardians, Tom Clancy's Rainbow Six Siege and Assassin's Creed Syndicate.
The holidays should also be a real battle, as Rise of the Tomb Raiders, Call of Duty Black Ops III and Star Wars Battlefront all come out in November and will fight it out for supremacy.
Right now, the consensus believes revenue will increase just 2% in fiscal 2016. I think that's too low, and that GameStop could bring in better than 5% growth on the topline. That means the company would end the year with sales closer to $9.7 billion instead of $9.2 billion.
Gross margins should also improve as the year goes on, driven by a favorable sales mix. Increasing adoption of next-generation gaming consoles should help drive same-store sales and next-gen game sales. Increasing cash flow will lead to additional stock buybacks, driving earnings per share higher.
All told, I think revenue momentum will drive the stock into the low $50s.
