GameStop Stock Will Have a Lot to Prove in 2017

By Rick Munarriz Markets Fool.com

Image source: The Motley Fool.

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Wall Street's been sending out mixed signals when it comes to GameStop (NYSE: GME)these days. Yesterday, it was Standpoint Research, upgrading shares of the video game retailer from hold to buy.

Standpoint isn't necessarily more upbeat when it comes to assessing GameStop's fundamentals. It's sticking to its earlier $34 price target. However, with the stock taking a beating lately -- it's trading 10% lower in 2016 -- Standpoint's goal is pretty aggressive. It may not have seemed that way when the shares were trading as high as $33.72 in late April, but now in the mid-$20s, we're looking at 34% of upside from Thursday's close.

Standpoint's upgrade came a day after Piper Jaffray analyst Michael Olson issued a note warning about the potentially problematic holiday sales at the small-box retailer. Olson feels that comparable-store-sales for the holiday period plunged 11% this year, at the low end of its earlier guidance calling for comps in the quarter ending next month to slide between 7% and 12%. Olson wasn't bullish ahead of the note, and he's not changing his tune. He is sticking with his neutral rating and his $23 price target.

They're not the only Wall Street pros chiming in on GameStop lately. Mizuho initiated coverage of the stock last week, going with a buy rating and a $35 price target.

Where the gamers aren't

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It's hard to get excited about the state of video game retailing these days. Industry tracker NPD Group issued an update earlier this month, estimating that video game software sales plummeted 22% in November since the prior year. Some of last year's releases were hard acts to follow this time around, but NPD also pegs last year's software sales as a 7% slide. In short, we're talking about a roughly 30% decline during the seasonally potent month of November over the past two years.

Die-hard gamers have been turning to digital delivery, and casual gamers have gravitated to low-end mobile apps. Game downloads sting GameStop beyond the obvious lost initial sales. GameStop relies on trade-ins that is resells at higher markups than its new games and gear.

GameStop has beefed up its presence in digital delivery, and Mizuho's bullish note last week touched on that growth outlet.GameStop has also diversified into other small-box concepts selling mobile and PC products. It even acquired the ThinkGeek store selling "geek culture" merchandise.

The diversification hasn't been enough. Net sales slid 3% in its fiscal third quarter, and analysts see the top-line decline rate accelerating during the holiday quarter. Stability on the gaming front would go a long way toward making GameStop stock a winner again in 2017, but it will also only help if itsThinkGeek, Spring Mobile, Cricket, and Spring Mac stores expand to the point where they're moving the needle.GameStop stock has already started to rebound since hitting a four-year low last month, but the real upticks in the year ahead will wait until the company's fundamentals start improving again.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool has the following options: short January 2017 $28 puts on GameStop. The Motley Fool has a disclosure policy.