Why GameStop Corp. Stock Will Head Higher in the Long Term

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The bear thesis on video gamer retailer GameStop Corp. (NYSE: GME ) is pretty well-known. GME stock is headed the way of Blockbuster Inc. Both companies dominated their respective industries when content distribution was done primarily through retail stores. But content distribution moved online, not just for movies, but also for video games.

Thus, just as Blockbuster was squeezed out by Netflix, Inc. (NASDAQ: NFLX ) and other over-the-top entertainment options, GameStop, too, will be squeezed out of an industry it once dominated.

That seems obvious enough. The logic is clear, and the conclusion seems right. Consequently, the popular trade has been to short GME stock.

But what this consensus thesis misses is the fact that unlike Blockbuster, GameStop is appropriately diversifying its revenue streams to adjust to a world without physical video game sales. Thus, while the traditional GameStop business may be headed for the graveyard, GameStop's new businesses aren't.

That gives GME stock value. And that value is far greater than the one the market is currently awarding it.

It may take some time (sentiment on GME stock remains dour), but this stock should head materially higher in a long-term window.

GameStop Will Be a Survivor of the Video Game Apocalypse

You would never guess it by looking at the stock, but GME has actually largely beaten analyst estimates so far this year. GameStop has posted three consecutive quarters of positive comparable sales growth.

But investors aren't biting on these positive comps because the consensus is that this is a near-term phenomena. The Nintendo Switch has launched to nearly unprecedented demand, and that is creating a massive tailwind helping out GME's whole business. But most believe that this is a one-time boost, and that next year, that tailwind will be gone.

That argument, though, seems unnecessarily short-sighted. Yes, the Switch has been huge, but the thought that it is a "one-time" thing seems to ignore the fact that new console launches happen all the time.

While it's unlikely that future gaming consoles will create the same tailwind for GME as the Switch, it is just wrong to assume that future console launches won't supercharge new hardware growth and, to an extent, new software growth (when consumers go in to buy the new Xbox, they might as well buy their first game, too).

Consequently, I don't believe this year's positive comparable sales growth should be taken lightly. It's a sign that consumers will continue to flock to GME for new video game hardware. Those rushes of new hardware buyers will have collateral positive effects on the rest of GME's video game business. Thus, GME's physical video game business may actually hang on.

New software growth is positive, while pre-owned sales declines are starting to moderate. Moreover, the rest of GME's business outside of physical video game sales will be just fine in the long term.

Hardware sales have longevity because that isn't something that can be replicated by a digital sale. Same with accessories and collectibles. The tech brands business is fine because consumers will always need to buy smartphones and other mobility offerings. The digital business will grow for the same reasons physical video game sales will continue to fall.

All together, those "other" revenue streams (new hardware, video game accessories, collectibles, tech brands, digital, and other) accounted for 44% of revenue last quarter and grew by 1%. That growth rate would have been higher if not for a delayed iPhone X launch which hurt tech brands sales.

In total, GME revenues rose 1.5% last quarter, on top of a 3.4% rise the quarter before that. Positive revenue growth is something that just failed to happen at Blockbuster during its secular decline .

Bottom Line on GME Stock

Trading at 5x earnings with an 8% dividend yield and 14% free cash flow yield, GameStop stock is too cheap to ignore. The only reason you don't buy this stock is if you think the business is going the way of Blockbuster.

I don't think that. GME has appropriately diversified its business to be a survivor of the video game apocalypse.

Moreover, the pre-owned business is showing signs of moderating (sales only fell 2% here last quarter). That business has been an Achilles heel for GME stock, so if it rebounds, this stock could explode.

As of this writing, Luke Lango was long GME and NFLX.

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The post Why GameStop Corp. Stock Will Head Higher in the Long Term appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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