GameStop’s Earnings: The End Of The Video Game Boom?

Investing is easy when you’re riding a hot industry.

Heck, when every stock within a certain industry is going vertical — who could ever lose?

One such sector is the video game industry.

Notice the chart of the PureFunds Video Game Tech ETF (GAMR) below.

The fund has virtually doubled the returns of the S&P 500 over the last 12 months.

But on the heels of a bad earnings report, “experts” now believe that GameStop (GME) just rained on the video game parade.

GameStop’s shares are being bludgeoned accordingly.

I asked my senior analyst, Martin Hutchinson, to get us the scoop.

The question I posed to Hutch is simple…

Is GameStop’s fall from grace a warning that the video game rally is over… or is GameStop simply on the wrong end (the retail end) of the profits?

Hutch’s full analysis is below.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist

Question: Martin, video game retailer GameStop has been beaten up lately. And the experts — and I use that term loosely — believe the company is falling victim to the online sales boom. Where do you stand on all of this?

Martin Hutchinson: It’s interesting. Jim Cramer says that GameStop is history and that video games in general are dying. But I’m not sure I buy that. We’ve talked about retailers in the last few weeks, and that brick-and-mortar retailers do have a problem with the online sales.

And that’s certainly a problem in video games, where the brick-and-mortar retailers are losing market share to digital downloads. But it’s a little bit like some of the other retailers that I think aren’t going to disappear altogether. Because game buyers, many of whom are teenage males, like to check out games before they buy them. You want to see what the thing feels like before you put out $50 to buy the thing.

Also, the video game stores have been an area where they socialize. GameStop has cut down the number of game tournaments, for example. And that’s been foolish of them, because local game tournaments are very much the best way to sell games. Buyers all turn up for these things, particularly in the fighting games area. If you hold a good local game tournament, you’re going to sell an awful lot of product.