GameStop Sees Purchase Intent For Nintendo's Switch, Microsoft's Scorpio At Or Above PS4 Levels

Following investor meetings with GameStop Corp. GME, Wedbush said in a note released on Wednesday that it expects the purchase intent for Nintendo Co., Ltd (ADR) NTDOY's Switch and Microsoft Corporation MSFT's yet-to-be released Scorpio at Sony Corp (ADR) SNE's PS4 levels or higher.

Analyst Rob Lloyd noted that there has rapid sell-through of Nintendo Switch, with GameStop finding it difficult to keep it in-stock despite market-leading allocations. The company had said last week that the Switch provided significant life in in-store traffic and that it expects to chase supply throughout the year.

Elevated Expectations For Switch

Wedbush pointed to Nintendo's statement that it expects to ship roughly 45 percent of the devices to North America, with roughly one-third of those numbers going to GameStop. While Nintendo targeted shipments of two million devices by the end of March, the firm noted that a Wall Street Journal report said on March 17 that Nintendo's production target of eight million devices for the year ending March 2018 could double to 16 million or more.

The firm expects to have additional details on Nintendo's plan for fiscal-year 2018 when it provides its initial full year guidance and shipment targets on April 27.

Other Catalysts For Video Games In 2017

• Microsoft's expected launch of Project Scorpio ahead of the holidays.
• Activision Blizzard, Inc. ATVI's next "Call of Duty" game (rumored to be set in World War 2) and "Destiny 2."
• Electronic Arts Inc. EA's "Star Wars Battlefront 2."
• Take Two Interactive Software Inc TTWO's "Red Dead Redemption 2."

Wedbush said GameStop expects easing PlayStation VR supply this year, having disclosed last week that it has been selling out of its VR allocation in less than a week.

The company also expressed hopes that it will not see the same hiccup in consumer spending in 2017 that it saw in the second half of 2016 from the launches of multiple hardware devices in a crowded window that included Xbox One S bundles (starting in August), PlayStation VR (released on October 13), PlayStation 4 Pro (released on November 10) and NES Classic Edition (released on November 11).

Category Expectations For FY17

• Hardware revenue to be flat to up slightly.
• New software revenue down a mid-single-digit percentage.
• Pre-owned revenue down a mid-single-digit percentage.
• Technology Brands revenue up 10–16 percent to roughly $895 million–944 million (with an operating profit of $120 million).
• Collectibles revenue up 30–40 percent to roughly $650 million–700 million.
• Tracking to Collectibles revenue of $1 billion by 2019, with tech brands operating profit of $200 million.

Growth In New Business — Reward For Investor Patience

Wedbush outlined GameStop's belief that evidence of growth, especially in its new business may be the best way to reward investor patience in 2017 and beyond. "[R]eturning additional capital to shareholders through incremental share repurchases or another increase to its dividend remain options for the company," the firm opined.

Wedbush also referred to GameStop's previously outlined plans for its free cash flow, namely dividend, technology brands expansion, potential M&A, and share repurchases.

Wedbush has an Outperform rating and a $25 price target for the shares of GameStop.

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What We Know Now About The Nintendo Switch

February Digital Gaming Round-Up: Activision's Blues, EA Titles On Top, Ubisoft Makes A Splash _________ Image Credit: By Ezzex - Own work, CC BY-SA 3.0, via Wikimedia Commons