GameStop (NYSE:GME) has just reported its Q3 earnings, and the initial reaction from the Street in the first few minutes here of after-hours trading is positive. This GameStop earnings period was a highly anticipated quarter. We would argue the results of this Q3 were absolutely critical. Sure, many quarters are anticipated, but so many were (correctly) saying that this quarter could set the tone for whether the name was going to head under $20 and if it really signaled the impending death of the company. Now, you may recall when we talked about the performance being simply disgusting given the beating it was going to take following weak holiday sales. It got pounded. We said to buy it because it would rebound. It did. Then Q4 earnings came out and it got hit again, we said to buy, it rebounded. Then, after Q1, we said let’s wait for Q3 and hold on. This was because there were (and still are) prevalent fears that GameStop has no real growth prospects, or worse, that it will be entirely cannibalized by the competition. It is not all bad. The company is diversifying away from just standard gaming. It is investing in keeping traffic in the stores. The name suffers because expectations remain low; however, the name managed to surpass expectations, further backing up our opinion that a new Video Game cycle is upon us, starting of course with the all new Nintendo Switch. Can you stay long?

Let’s get right to the point here. The headline numbers were strong. GameStop delivered a top and bottom line beat. Considering recent quarters, this was a win, in our opinion. The company saw sales of $1.99 billion in Q3, which were actually up 1.5% year over year and beat analyst estimates by $30 million. Earnings came in at $0.54 per share and crushed the consensus expectation by $0.11. The results are pretty strong. Why were sales up? In part due to where we are in the gaming cycle, with the introduction of the Nintendo Switch and related games and accessories. Those are facts.

Let’s be real here. Many key indicators have been resoundingly negative. Same-store sales is a key indicator. We just mentioned the Nintendo Switch leading into the dawn of a new video game cycle. We are very pleased to report that we saw positive comp growth. This is the one indicator above all else we have been watching. Back in Q4 2016, they were down 16.3%. This includes being down 20.8% in the United States shops. In Q1, same-store sales were up 2.3%, and US shops were strong but still down 2%, while international growth was 17%. Then in Q2, the Nintendo Switch and related accessories drove a positive 1.9% increase in comparable sales. Here in Q3, comp sales were up 1.9%. Sales rose 0.6% in the U.S, but they were up 4.6% internationally. Overall, this is a win.

Digging a bit more, new hardware sales jumped 8.8%. Why? Because customers were continuing to show strong demand for the Nintendo Switch. But the software side of the equation rebounded and this is key, with new software sales rising 5.4%. Pre-owned sales also struggled, down 2.4%. While the latter was expected, the former caught me a bit by surprise. However, much of this is explained by the aging Xbox One system and the fact that the Switch is so news, and as such demand for used games has waned. Regardless, from an investment standpoint, these results are decent, but we can definitely see why some would buy this news.

Digital revenue continues to be a major asset for the company. In fact, digital revenue sources grew 11.9% tan as reported basis, digital receipts fell 16% to $37.2 million. Adjusted digital sales were up 1.8%. Sales growth stems from the sale of downloadable content and gaming. There was growth in other areas too, but the company’s technology brands sales fell 10% to $194 million. While the company recently picked up ThinkGeek, it helped collectible sales spike 27% to $138.4 million.

Can you buy now? Well, if you believe in the cycle, then yes. The GameStop earnings were strong. We have been in and out of the name as a trade. The closer to $16 the stock was the more we liked it, although we have been strong buyers under $20. We expectearnings in 2017 of $3.20-3.40, and at $16 that means the stock would be trading at just 4.7 to 5 time earnings. Factor in the $0.38 quarterly dividend, and at $0.16 we have a stock yielding 9%. We will take it. In addition, given what we saw in Q1 and now in Q2, it is very likely that comp sales come in at the high end of the guidance range of -5.0% to 0.0%. Despite the negative trends over the last two to three years, the payout has been hiked and earnings easily cover them. That is resiliency. It’s a great trading vehicle, and at the right price point, it’s a bargain bin income name.

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