Various forward multiple methods are applicable to valuing GameStop (GME), including P/E, P/FCF, and lease-adjusted enterprise value (or AEV) to EBITDAR. The former are perhaps more applicable against the relatively sparse comparable universe with differing rent models among Big Box retailers. We arrive at a target price of $57.70 that is consistent with 12x FY15 P/E and 10x FY15 FCF.
The stock remains heavily shorted, with the latest numbers showing 15 days to cover and 30% interest of float. A sustained earnings beat or spate of good industry news through the rest of the fiscal year might well trigger some manner of squeeze.
The Market Realist Take
According to research firm The NPD Group, hardware sales surged 95% year-over-year in May to $187 million. The rise was driven by Sony’s (SNE) PlayStation 4 and Microsoft’s (MSFT) Xbox One. Spending on physical gaming software (console plus portable) increased 57% to $274 million as total physical gaming software (console plus portable plus PC) rose 51% to $284 million. Physical gaming accessories were up 8% to $124 million.
Gartner said last year that the worldwide video game marketplace, which includes video game console hardware and software, online, mobile, and PC games, will reach $93 billion in 2013—up from $79 billion in 2012. This growth will be driven by strong mobile gaming and video game console and software sales. The market is forecast to reach $111 billion by 2015.
Gartner observed, “Sales of existing console hardware are forecast to grow from $15.9 billion today to $22.7 billion in 2015.” However, it also said, “Dedicated game handheld devices and traditional PC games will play a smaller role in the game market and cease to be important game platforms.”
Gamestop has noted the shift to digital formats and increasing growth of social and mobile gaming. The company said it expects to further make investments to “grow its digital sales base and enhance market leadership position in the electronic game industry and in the digital aggregation and distribution category.”
GameStop has also diversified its business via acquisitions of Spring Mobile and Simply Mac to benefit from the re-commerce trend. CEO Paul Raines said on the company’s investor day that the “wireless market is perhaps the most exciting market in the consumer space.” He also said, “Connected devices are forecast to go from $8 billion today to $50 billion in five years. And many will be sold in a store and available for trade and refurbishment at GameStop. The wireless growth opportunity for GameStop is only beginning.”