Gamestop (GME)

Even after the recent beating, Gamestop still trades at a 30% premium to the market. This is as the main product cycle is winding down: big games have already been released, and the tough consumer environment is likely to stick around a bit longer than anyone expected. Certainly, when we ramped up on DKS, we did not imagine $135 oil. Specialty retail didn’t see the poor economy effect until recently, and "Dick’s Sporting Goods", got destroyed after a missing slightly on the top line. Gamestop is looking at tough comps ahead and analysts are likely to ratchet down their expectations and possibly “kick down to a hold stance,” as one of our buy side contacts puts it.

GME is a well run company (with 1/5th of the market) and a monster of a stock. But there is some near term challenges the company will be facing. Long term, you can argue all day that owning the name is the best way to play the secularization of gaming (families and females joining the young male core base), but the near term window is presenting a shorting opportunity; management insists the download threat is “way down the road,” but they’ll have to be a bit more specific at some point – and soon.

On 6/02/09 Sony announces the remake of there portable device the PSP. This device will not use a physical disc to play games but will download games from an online store. This announcement by itself does not signal a bearish long term outlook because admittedly Sony will continue to support the previous machine which does use physical game disc. Additionally although Sony's competitors, Nintendo and Microsoft, have game consoles that allow for downloadable content there main medium for games are still game disc. What this announcement does signal is an oncoming shift to more convenient means of distribution such as downloadable games that if continued and consumer demand rises may damage revenue models for Gamestop. Evidence of this can be found with Blockbuster as Nextflix and Blockbuster's own online services have eroded the profitability of the store front movie rental business. As technology improves, network access widens and internet speed increases, downloading content directly into consumer’s homes have the potential to become the dominant means of distribution. Gamestop needs to start to show an understanding of potential problems in future earning and demonstrate a willingness to develop and adapt a business model to accommodate this change.

GameStop is competing with some of the world's largest retailers. The company could struggle to stay competitive with giants like Wal-Mart and Best Buy, who are able to offer lower prices. In a move that would put it in direct competition with GameStop, Blockbuster (BBI) recently introduced expanded game sections in its stores, with a focus on selling game consoles and new games in addition to renting games and selling used titles. Unlike GameStop, however, Blockbuster is focusing on the casual, mainstream buyers as opposed to hard-core gamers, and gunning them down with attractive packages. One such bundle for $499 included a Sony PS 3 game console, an HDMI video cable, remote control, a copy of the Spiderman 3 Blu-ray movie, a copy of the PS3 Transformers game and a 12-week PS3 game or Blu-ray movie rental card.

High oil prices kill their already slim margins