Is GameStop a Go?

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GME 062416 25.5116 Yld 5.80 PE 7.09

GME 13.04%     GME with "Divi-X" 13.05%

GameStop Corp. (GME) has been on my radar for a while now, but not in a good way.  GameStop meets most of my metrics, which is good, but it has been in a steady decline since November of last year.

I must confess that I am a gamer and I just took a new position in GameStop myself (details below), however, I am only interested in GameStop strictly from an investment standpoint even though I am also a frequent patron of GameStop.  Coincidentally, it is my gaming interest that sparked my curiosity in GameStop after viewing events at the latest E3 convention (one of the largest trade expos for all things gaming) and learning that PlayStation was rolling out their new virtual reality hardware, PlayStation VR, this year.

That development alone, although positive and just announced on Friday that GameStop sold out of its second allotment of PlayStation VR orders in four minutes, did not flash the buy signal for me, it just nudged me to look a little deeper into GameStop.  I was surprised at how much I did not know about GameStop, for example:

  1. Something that might cause an investor to be bearish on GME is the industry's push for digital sales.  It turns out, GameStop has built a thriving billion dollar a year digital sales stream to which, 95% of digital sales take place in a physical GameStop store and 60% of those sales are derived by GameStops ability to allow consumers to purchase digital content with cash, trade-ins and gift cards.
  2. They continue to invest in their Technology Brand stores which partners with Apple, AT&T, and Cricket, allowing them to sell their retail products and services which should account for nearly a billion dollars in revenue in 2016.
  3. Their collectibles segment marketed under the ThinkGeek brand name.  GameStop expects their collectibles to contribute nearly a half a billion in revenue in 2016.  Additionally, the collectibles market is expected to grow to a 16 billion dollar industry by 2019, of which GameStop hopes to garner as much as a 4% market share by 2019, representing annual sales of a billion dollars.
  4. Lastly, physical gaming is not dead.  Last year, physical video games accounted for 75% of Total Operating Earnings.  This year that number is expected to be 70% and as low as 50% in 2019 as GameStop continues to add revenue from their other categories.

In the near term, GameStop does face shorting pressure from the normal lull in between generational hardware cycles and it is unknown if the upcoming release of virtual reality will help alleviate the pressure, but we won't have to wait too long for an answer to that.

Company Profile

GameStop Corp. is an omnichannel video game retailer. The Company sells video game hardware, physical and digital video game software, video game accessories, as well as mobile and consumer electronics products and other merchandise through its GameStop, EB Games and Micromania stores. The Company operates its business in four Video Game Brands segments: United States, Canada, Australia and Europe, and Technology Brands segment. Each of the Video Game Brands segments consists of retail operations, with all stores engaged in the sale of new and pre-owned video game systems, software and accessories. Its Video Game Brands stores sell various types of digital products, including downloadable content, network points cards, prepaid digital, prepaid subscription cards and digitally downloadable software, and also sell certain mobile and consumer electronics products and collectible products. Its Technology Brands segment includes its Spring Mobile and Simply Mac businesses (Source:  Google Finance).

The Last Five Years

GameStop hasn't actually been paying dividends for five years, so "Divi-X" would not have even considered GameStop until January of 2012 when it's yield represented 2.57% of it's then share price of $23.36.  To date, below is what a $10,000 investment would look like:

First our 'Leverage Projection Worksheet.'

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You can see that with our 2.57% dividend yield, we were able to purchase another 88.45 shares using the "Divi-X" system.  These additional shares would have levered us at a very reasonable 17.12% of our total purchase.

The chart below shows you the results four and a half years later.

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Not much to brag about here.  After all this time, "Divi-X" only managed to eke out an 'All Cash' investment by a mere hundredth of a percent, or just over a hundred dollars.  If you were a short-term holder in GameStop over the last four and a half years, there was definitely more than one selling opportunity that "Divi-X" would have contributed nicely to your bottom line.  Additionally, it hasn't quite been a full five years yet, so there's still time for some upside potential.

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GameStop's returns have been relatively modest since 2012 but as of 2016, "Divi-X" would have just barely surpassed the dividend yield of an 'All Cash' investment by a hundredth of a percent as well, but as you can see from the chart below, "Divi-X" will widen its yield spread over 'All Cash' every year after that whether GameStop raises its dividend in the future or not.

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Taking a New Position

As I noted at the beginning of the article, I have taken  a new position in GameStop myself on June 24.  I did not invest $10,000 but since this is a "Play of the Week" and the returns will be added to the "Divi-X" 'Play of the Week' Index, we will be using a $10,000 investment.

Here is our new 'Leverage Projection Worksheet':

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click to enlarge

Even though the share price is roughly the same now as it was four and a half years ago, the dividend yield is more than double what it was then.  So now, instead of the 88.45 shares we got back in 2012, we now pick up an additional 247.21 shares.  Almost three times as many!

Next, we're going to take a look at our expected milestones for the next five years:

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And finally, our dividend picture:

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The last four and a half years didn't really make "Divi-X" very relevant with GameStop, even though there were opportunities to take money off the table, but its a whole new game now.  As of the close on July 1st, "Divi-X" is up over ten percent and already outperforming 'All Cash' by nearly four percent.  GameStop will be included in the "Divi-X" 'Play of the Week' Index so we will be revisiting it again next year.  Till then, many happy returns!

Authored by Lee Carroll Wentker

All screen captures are taken from 'The "Divi-X" System Workbook'

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The security showcased here is for learning purposes only. It is not a recommendation or an endorsement of any kind. Do your own due diligence before making any investment.

All work is copyrighted by The Dividend Times, LLC 2015 - 2016



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