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GameStop Corp. Message Board

  • danielwilkins21 danielwilkins21 Apr 15, 2009 9:31 AM Flag

    why I'm shorting GME now

    First, I'd like to thank the rational posters on here, both long and short. You've both helped me make a pretty penny on GME, though not without patience and sweat.

    As many of you know, I have been long GME for several months. I bought on the way down, from about $28 down to $17. I have sold all my long calls and now own puts. Here is why:

    GME will continue to grow earnings, but at a rate that will disappoint the Street, especially in light of tough comps. How much is priced in? If GME were trading at $25 a share, I'd say it was priced in. At $31, with all this optimistic momentum, there will be much disappointment as there was last October with the tough Halo 3 comps.

    The long-term threat of digital download is a dark cloud hanging over this stock, which will distort perceptions on it forever. There will *never* be another quarter without news of this threat bringing down the stock. Are these fears justified? who knows...but the problem is not whether the fears are justified, but that the fear will outweigh any good news. Suppose the Amazon used business turns out to be a flop...will that help GME? No. I doubt Amazon will succeed in on-line trade-ins, but that's not the problem with GME. The problem is the many downside catalysts and lack of upside catalysts. The PS3 will have a price cut sooner or later...and other than that, I don't see what will help GME (the stock) in the next year.

    And if there's bad news to go with it? forget about it. Though not priced to 'perfection', there is little tolerance for GME longs (ie, long institutional investors) for any hiccups...we all saw that in Q3 last year.

    I don't recall the exact numbers of what percentage of GME's revenue comes from portable gaming systems, but these will be the first to go digital distribution-only. Here's why--battery life and simplicity. It's a waste of space and batter life to have clunky cartridges.

    As for consoles games--it's not a matter of 'if', but 'when'. even if you go by the longer estimates of aobut 7 years, you would have to figure that this would crush GME on a discounted cash flow basis. All DCF analyses assume some sort of residual value that goes out into infinity--past the foreseeable future, and this represents a substantial chunk of what analysts/investors think a company is worth. That value for GME will be close to 0 after the next 10 years or so. Let me put it another way...if I were to buy the entire GME operation myself, I would only be willing to pay for the cash flows I could expect to receive in the next 10 years. Because I would not expect to receive any after 10, and perhaps not after 7. That's like buying an apartment complex that will bring in revenue for 7-10 years and then after that, the building will be burned to the ground and you get nothing for it.

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    • Sold half my puts, sold all my April 30 puts which I bought last week. I think we are likely half-way to a bottom from the highs...so down about $4 from $32, $4 more to go, so I'd be a buyer at around $24. My April 30 puts, which I bought at the high, are paying off handsomely. I knew the NPD would disappoint, as I suggested in my post above. Remember--this stock moves up a little on great news, down a lot on anything else. Throw in the continuing fears of digital distribution, and you've got a recipe for the stock tanking.

      Also keep in mind that management's reaffirmation of guidance means little to the traders controlling this stock. Perhaps GME's used business is thriving right now, and that the NPD #'s don't include this is why GME can have higher SSS despite the low NPD #s. Perhaps GME is gaining substantial share, with the demise of Circuit City and lousy vg sales from BB. Who knows...GME will make money, I do not doubt it, but the stock will tank for fear and expectations that have gotten too high.

      Good luck to all.

    • You win a prize, sugar.

      SAN FRANCISCO (MarketWatch) -- Sales of video game software in the U.S. slid 17% during the month of March compared to the same period last year, according to data from the NPD Group released Thursday afternoon. The results are likely to disappoint Wall Street analysts, who were expecting sales to remain largely flat with the previous year. Sales of game hardware fell 18%. The Nintendo Wii sold 601,000 units while the XBox 360 sold 330,000 units and the PlayStation 3 sold 218,000 units, according to the NPD report.

    • I agree and have been saying this for a while now (and getting flamed I might add). However, I would be cautious shorting in this market because a rising tide raises all ships. Enough said.

    • Too early to go short. Bull's still in control. Sell above 35 and buy below 30. Now, just stay on the sideline and watch.

    • GME has great margins, but in the new economy, everybody will jump on this used-game business bandwagon. It's not a dirty little secret anymore, it's 'out there', attracting copy-cats (who will be less successful than GME) and, more so, the ire of game publishers.

      I agree with GME that used games help drive sales of new games, but there are several arguments the publishers could use against GME to rebut this. Whether this arguments are sound is irrelevant, b/c the fact that they hate GME so much compels them to act. Furthermore, digital distrubtion is 'sexy' to them, and something management will be eager to boast about (ie, EA...whose management is a joke).

      Another problem with GME's argument that used sales drive new sales, is that the publishers don't necessarily capture that 'new sale'. If i trade in Grand Theft Auto IV to get Fallout 3, Take Two doesn't see a dime of that. They feel ripped off. Even if the money I used to buy GTA IV came from trading in games from EA and ATVI, Take Two will still feel short-changed. And who knows...maybe they are right, in teh case of TTWO ? B/c they are so reliant on just a few games, it hurts them more than a diversified publisher.

      it's a complex situation....but I think GME is fairly valued around $25 for a trade back to $30. At $31 or higher...I'm a seller.

      Good luck to all and thanks for the helpful and informative posts over the past months.

      • 2 Replies to danielwilkins21
      • More competition for GME today. Two news stories,

        First, RadioShack expanding its console trade-in business to all its 4,400 stores.

        Second, Target starting a program where you pre-order games like Punch Out, EA Sports Active, Ghostbusters and others, and they will give you a $5 Target gift card when you pick the game up.

        One other problem for GME is they don't "own" anything. They have no pricing power. They can't raise prices, all they can do is hope they don't lose too much marketshare to retailers who are willing and able to undercut them.

        Target is a great example. We shop there all the time, and we'd have no problem spending that $5 gift card. Whenever I have GME store credit though, it takes forever to spend because their prices are always higher than the competition so I go elsewhere for new games, like Fry's, Amazon or Best Buy.

      • While some of your thoughts have some validity, they are not reasons to short the stock. Here are some "other" ideas that would say that GME is a great investment into the future:

        1. Pay for bandwidth. There are numerous "tests" in markets where the bandwidth companies, ie comcast - time warner etc. are creating "pay for bandwidth" tier pricing. That will not help digital download companies at all. Netflix will get hit hard as well as some of these start up companies dealing in videogame distribution. The odds of this becoming a reality is more immediate and real than GME losing market share to digital downloads.

        2. Used, new, whatever. Some of the unprecidented growth this entire industry has enjoyed is directly because of GME. They were the company reserving titles to help ensure companies like EA etc. knew what were hits and what were duds. They were the company that created a value position by being able to trade in games. They create excitement around gaming. For them it's all or nothing. Not like a Wal-mart where it's "just" another department.

        3. The pie gets bigger. So what that the publishers don't share in the revenue of used games. If I remember correctly, each of their stocks have done tremendously well in the last 5 years thanks to GME. Without GME opening stores all over the world, used revenue would have been the least of their worries.

        I could go on to talk about the strength of the management and executive leadership etc. but it just labors the point. GME is a solid company that is in the videogame business...for now. Who know who they could buy or become in future years. Like many great companies, you move, you adapt, you seek out additional opportunities. They generate the cash now to give the ability to have opportunities down the road.

        Sometimes you invest because you like oil. Sometimes you invest because you like the companies who make the pipelines. At the end of the day it's hard to argue that GME is a very well run company. Not many of those around lately.

 
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