Game Not Over for GameStop

Taking a look the technicals of GameStop (GME), it's clear that the Street has been hard on this former high flier. Institutional investors sold 8.9% of their shares quarter over quarter, and there are 7.2% of the shares in the short position as of this writing. Clearly there's strong downward pressure, but do the earnings justify this downward discrimination?

By missing the earnings estimates by 8% in October 2008, GME paid dearly and fell into the multitude of stocks that got caught in the crosshairs of the massive sell-off. Jim Cramer purported on Mad Money that the GameStops of the world are destined to see significantly slipping earnings, being cast aside with the slap of a sell-sell-sell.

But by beating their estimated numbers by 2.3% in April, and with a monopolistic loyalty base among the under 25 crowd, the landscape of growth expected to be 8.4% in 2010 and 4.3% in 2011 warrants upward stock price mobility and appreciation of GameStop's brick-and-mortar pricing power.

When one takes a look at the competitive landscape, Blockbuster (BBI) stores are drying up left and right, under siege by Netflix (NFLX) and Amazon's (AMZN) foray into movies-on-demand, leaving GameStop as virtually the only game in town available at local strip-malls, closer to kid-filled neighborhoods in suburbia across the country who loath going to Wal-Mart (WMT) for its size and off-putting big-box cookie-cutter environment.

GameStop espouses a much warmer atmosphere with more easily accessible Xbox 360/Wii (MSFT/NTDOY.PK) demonstration consoles and as such has earned the loyalty of many-a-youngster.

In my immediate region, two more GameStop stores have popped up and they're buzzing with activity regularly. Further, the rewards program with offering 10% off used games and offering a generous return policy for used games purchased from them invites potential buyers back into the store for trade-ins and potential additions to one's gaming collection, lured by the televisions in perma-E3 mode showing previews of new releases.

Just as "video killed the radio star," Napster (NAP) killed the Tower Records/Sam Goodies of the world, Amazon is mortally wounding the Barnes and Noble/Borders (BKS/BGP) of the world and GameStop is carving a niche that Amazon is hard-pressed to compete with even with its more aggressive pricing. Shipping is always a consideration, especially with it comes to products price sensitive down to a few dollars. Legislation putting additional pressure on internet retailers to start paying sales tax will only add to GameStop's competitive advantage.

The bottom line, especially with immediate gratification hungry kids, is that the value-added nature of adding the palpability factor of being able to touch and inspect the back of the game itself to preview the delicious gaming ecstasy that is to come compliments of their favorite titles, in hand, and offering the opportunity to play at home with friends the same day is too compelling a competitive advantage over Amazon to be under-appreciated.

When we look at insider buying, it's clear that the CEO and CFO both purchased ~$100k worth of shares on November 24th in an attempt to quell the tsunami of a selloff and as a showing of corporate solidarity than a particularly keen buying opportunity. Fast forward to today and in the last 30 days we've seen the CFO buying a $1,000k, a cool mill, worth of GME stock at $22.48 and $25.08 in equal proportion. One has to go back to 2006 and before to see any other buying activity by any other officer of GME stock amidst a sea of selling.

Bottom line: this electronics store is lagging the industry with a sub 10 P/E, strong technicals, and solid sales increases prospects. I expect $30 within 3 months time.

Disclosure: No positions

Comments

[stink726:]

Interesting article; thanks

Jun 15 03:13 PM

[aherrera:]

If you would look in to the games that are set to get released within the second half of the year, you would see the potential of an increase of revenue for game stop. Bio shock 2, Modern Warfare 2, Assassins Creed 2, Batman, HALO ODST and many more that proved to be great sellers when the originals were out will surpass sales. I don't know if the $30 mark will hit in three months but I feel sure it will happen soon after. and also great artical

Jun 16 05:26 PM

[Bob Mowry:]

Indeed, Aherrera, I'm rethinking that $30 number in light of the economy as well. Thank you for your comments.


On Jun 16 05:26 PM aherrera wrote:

> If you would look in to the games that are set to get released within
> the second half of the year, you would see the potential of an increase
> of revenue for game stop. Bio shock 2, Modern Warfare 2, Assassins
> Creed 2, Batman, HALO ODST and many more that proved to be great
> sellers when the originals were out will surpass sales. I don't
> know if the $30 mark will hit in three months but I feel sure it
> will happen soon after. and also great artical

Jun 27 08:03 PM