GameStop: Short Magnet or Recesson Play?

GameStop (GME), the only pure-play investment best on video-game retailing, offers investors an interesting conundrum. On the one hand, the stock isn’t cheap. Gary Balter, an analyst with Credit Suisse, notes today that the stock’s multiple - 26x 2008 EPS, 21x 2009 - “has moved the stock to the forefront for the hedge funds looking for shorts in our sector.”

In fact, Balter notes that the stock has become the most expensive retailer he follows. But he maintains an Outperform rating on the stock, and says that “the combination of a much better product cycle than envisioned, a shift to higher margin software growth from hardware and the beginning of the highly profitable used [game] cycle point to further earnings upside in the near term.”

He does caution that comp store sales could be impaired in the near-term as sales shift from consoles to software; he advises looking at gross margin comps instead. The one worrisome thing to me is that he calls this a “macro-free story,” by which he means the video game industry shouldn’t be affected by a recession.

Oh, I dunno. I can buy the rest of his logic: the hardware base is strong and growing, there are some big new titles in the offing and the used software cycle should accelerate as we move into the third year of the current generation of consoles. But a “relative beneficiary of the current macro slowdown,” as he puts it? I think “relative” is the key word here; it might get hit less than other retailers, but even gamers may get more conservative as gas prices rise and people lose jobs.

Balter maintains his $65 price target.

Comments

[PitBoss]

If you don't buy the "macro-free story" ask yourself what all these unemployed mortgage brokers are doing... Drinking beer and playing video games.

[GKM]

P/E ratio of 22. Price to book of 4.5. The trend on the stock is down. Don't fight the trend. A retest of the $41 low is likely and a breach means $34 or as low as $27. A good short on that break.

Interesting that it bucked the trend in a down market but I would favor the short side currently.

[Sango]

Well this week was good cause of the sale "Super Smash Brothers" and there won't be any big game sale til late April for GTA IV and Mario Kart.

[Th3InfamousI]

I agree with everything not a cheap retailer at 26x estimates. But the future looks great for GME. I do believe this is a solid recession play, I think people need to look at video games in a different style of discretionary spending. With the take off of the new consoles and video games broad reach among age groups, I consider that video games are a relief to some hurting by the high gas prices, etc. Buying a $70 video game every couple of months is getting cheaper by the day, instead of going out to bars or driving cars.

I was long TTWO sold with the EA bid, and went long GME