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GameStop’s (NYSE:GME) stock plunged by 8% on January 7, as Sony announced a cloud-based gaming service, Playstation Now. [1] The project will leverage Gaikai’s streaming technology to allow gamers to play popular Playstation 3 games on PS3 and PS4 platforms without having to purchase physical disks. Sony will launch a Beta version for the U.S. at the end of January and expects to roll out full services by mid-2014. [2]

In the long term, this could have an adverse affect on GameStop’s business, as the company earns a quarter of its revenue from software sales. But we do not expect an impact on short-term results. The retailer has already shown its ability to adapt to the digital gaming revolution by pre-selling digital downloadable content (DLC) and selling it on the day of launch. Digital sales accounted for 23% of the company’s gross profit through the first nine months of 2013. GameStop acquired Spawn Labs’ game-streaming services in 2011. The platform enables gamers to transmit HD-quality (720p) content over the Internet via a peer-to-peer connection. GameStop’s R&D department is developing the service further and could provide an alternative to Sony’s service. Sony’s streaming service also has limits in terms of availability of high-speed Internet required to seamlessly play games, and the gamut of games available on the cloud.

We are maintaining our stance on GameStop and will keep an eye on the performance of the Playstation Now Beta service, as well as any announcements from GameStop.

Our price estimate for the company’s stock is $54, implying a premium of 20% to the current market price.

GameStop is expected to announce results for the 2013 holiday season on January 14. [3] During the third quarter conference call, management forecast a 2% to 9% increase in same-store sales for the crucial fourth quarter. [4] Microsoft (NASDAQ:MSFT) has already announced that over 3 million Xbox One consoles were sold during the 2013 holiday season, and the Playstation 4 is expected to match these results. [5] Amazon (NASDAQ:AMZN) reported particularly strong sales of gaming consoles, claiming that the new Xbox One and PlayStation 4 sold more than 1,000 units per minute during peak hours. [6] Electronic Arts (NASDAQ:EA) has suggested that each new console sold is accompanied by at least three game titles. [7]

GameStop is the biggest video game retailer in the U.S., with more than half of the Xbox 360 and PS3 titles sold in the U.S. last quarter being sold through the company’s stores. Judging by the strong sales of the next-generation consoles, we expect the company to comfortably beat its guidance, with strong hardware and software sales. More than 40% of GameStop’s annual revenues are earned during the fourth quarter, underlining the importance of the last three months of the year for the company.

Notes:

  1. GameStop Plunges After Sony Unveils PlayStation Now Streaming Service, Forbes, January 7, 2014
  2. PlayStation Now Streaming Game Service Coming this Summer, Playstation Blog
  3. Events Calendar, GameStop
  4. GameStop Management Discusses Q3 2013 Results – Earnings Call Transcript
  5. Thank You for an Epic 2013, Xbox Wire
  6. Record-Setting Holiday Season for Amazon Prime, Press Release, Amazon
  7. Electronic Arts’ Management Presents at UBS Global Technology Conference (Transcript)

Disclosure: No positions

Source: GameStop Investors Needn't Panic Over Playstation Now Just Yet