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Are We Wrong on GME?

By breinejm , Published: May 29th, 2015 12:19 PM CDT

Reading earnings news on Gamestop Inc. (GME), I am, for the first time, questioning if we are right with GME. I know digital is increasing, but they are getting some of that pie. The customers are extremely loyal and buy DLC (cards) through them. Their Apple product sales are increasing as Apple is increasing their product offerings. Combined with this being one of the most heavily shorted stocks and relatively cheap on a P/E and P/S basis, I wonder if we shouldn’t be more bullish on GME. Maybe it is because I thought of buying at 39 as an earnings play but did not and now I have remorse!


Estimates for FY (Jan) 16 – 3.83 (same as guidance) and FY17 – 4.38. This puts P/E at 11.5 and 10, respectively (based on share price of 44). I think this year's EPS guidance may be a bit low.

Comparisons to Radio Shack – one major difference, GME has customers in their stores. Same store sales (stores open >1 year) were up over 8% YoY. Digital sales were up over 20% and expected to hit 1 billion this year (~10-11% of rev’s). Not smart enough to understand the effects of AT&T and Cricket, but it doesn’t hurt, right?

Last quarter new generation console sales surpassed old generation (360, PS3), but software resales were down 3.4%. To me this means there is a lot of growth potential in this cycle in reselling XBOX One and PS4 games.

Simply Mac – It amazes me, but I can never talk sense to the Applephiles. They will spend double on a phone or triple on a laptop because it has a partially eaten apple logo. I think the potential of being an official Apple reseller is huge and with only 71 stores currently, this will provide growth.

Earnings – the Q1 beat of 9 cents was due to Mortal Kombat X, Electronic Arts (ERTS)' Battlefield Hardline, Take-Two (TTWO)'s Evolve and Warner Brothers Interactive's Dying Light. Say what? If they provided for good earnings, what about when better games come later? Only guiding for 2% increase in revenues for the year, yet we have new COD, AC, Star Wars, Halo 5, FIFA, Madden, and more.  They mentioned Witcher 3 is doing well and are excited for possibilities with Batman.

Buy backs – I know the good and bad of these, but if you are bullish, this helps maintain (manage) the stock price.

I of course am well aware of the increase in digital but it has been very slow and allowed GME to keep their base of customers, and also readjust into some other markets. So... are we wrong?

Related: TTWO, GME

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