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 Dicks Sporting Goods, we did not imagine $135 oil. Specialty retail didn’t see the poor economy effect until recently, and Dick’s 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.
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