Why Shares of GameStop Jumped Today

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What happened

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Shares of video game retailer GameStop (NYSE: GME) jumped on Wednesday following a third-quarter report that beat analyst expectations. A surprise jump in comparable sales pushed revenue higher, while some discrete tax items led to a big earnings beat. The stock was up about 7% at noon, after being up as much as 11.7% earlier in the day.

So what

GameStop reported third-quarter revenue of $1.99 billion, up 1.5% year over year and $30 million higher than the average analyst estimate. Strong demand for the Nintendo Switch drove an 8.8% increase in new hardware sales and a 5.4% climb in new software sales. Comparable-store sales rose 1.9%, and the company now expects to post positive comps for the year.

Other categories didn't perform as well. Used and value gaming sales slumped 2.4%, while technology brands sales tumbled 10.2% due to the late release of the iPhone X. Digital sales also dropped 16.8%, although they grew by 11.9% excluding the sale of Kongregate earlier this year.

Non-GAAP earnings per share came in at $0.54, up from $0.49 in the prior-year period and $0.11 better than analysts were expecting. However, GameStop realized an $0.11 benefit from discrete tax items. Backing that out, non-GAAP earnings would have slumped.

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Now what

The strength of the Nintendo Switch boosted GameStop's sales during the third quarter, but the inevitable death of physical game discs in favor of digital downloads remains an existential threat to the company's business model. The diversification strategy seemed to hit a wall in the third quarter, with both technology and digital sales slumping. And the used and value games business continued its slow decline, which will likely pick up speed as digital console games become the standard.

The market is cheering what looks like good news from GameStop. But the company's problems haven't gone away.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop. The Motley Fool has a disclosure policy.