Why I bought GME:
Bought the dip today at 18.01, (and yes, buying 'dips' has been painful here for the past six months), but here is why I belive GME is a good buy at this time:
* Trailing P/E of 8 and Forward P/E of 7 is an incredible value, especially for a company that has had the growth we have seen in GME from 2003-2008. The market is heavily discounting the stock due to risks from DLC and the poor video game sales in 2009, and other recent problems (CFO resigning, etc).
* GME hit and bounced off of major long term support around $17. This was both the low in 2008 and was a major support/resistance area from 2005-2006 (when the company's earnings were MUCH lower). Risk is relatively low here, as the 2008 low can be used as a stop, which is only a ~5-7% loss from these levels.
* GME is very dominant in the market, and is growing market share with the decline of some of its competitors. GME's profits are primarily based on used game sales. (New games were only ~22% and hardware ~7% of profits from the financial report I read. They make up a greater percentage of sales figures but have much lower profit margins). Ultimately the future of Gamestop is tied up in its used game sales.
Walmart began selling used games in Oct 2009, hammering GME, but pulled out in February.
Best Buy also experimented with used game sales, both using E-Play used game kiosks in their stores. Both pulled out and e-play has gone under.
Another big used game seller, Gamecrazy, closed about 40% of its stores months ago as Hollywood Video went under. Blockbuster is also facing severe issues, if it closes stores, people who may have rented games there could go buy used games instead from GME.
GME sales are outperforming the video game industry as a whole and they are gaining market share.
* The company is buying back shares at these low prices. I love the share buybacks at a P/E of 8, and this supports the stock price as well. They are currently in the market buying shares, so it makes sense for them to report no good news until they report on this March 18th in the earnings report.
* Financially the company is in good shape currently. Debt is moderately higher than cash on hand (would definitely peefer no debt), but the company is steadily paying off its debt while still expanding. 2006: 975M debt, 2007: 855M, 2008: 574M, 2009: 545M (from last years annual report) and 447M from the most recent quarter according to yahoo.
292M in cash, so the difference isnt huge.
* Sales comparables for 2008 were very tough due to the strong year in video games in 2008, while comparables for 2009 will be much easier. We have already suffered the negative effects and should now experience sales growth over last year by beating last years easier sales targets.
* GME and video game retail stocks have historically shown many rallies in the springtime. (2003 for example!). This sector was heavily beaten down in late 2002/early 2003, as it is now, and went on to make huge gains.
Excellent analysis..always refreshing to see someone clearly state the positives and negatives.
Let me add a few points:
Blockbuster recently announced the closure of additional stores and I believe that is very positive for Gamestop as the used game market dwindles. Yet we saw no boost to GME as everyone was too busy predicting more doom and gloom. You have to believe that Blockbuster has a very large inventory of games and Gamestop may be in a position to purchase these games at signficant price reductions.
I am not convinced that the Feb NPD will be positive but going forward you have to be very impressed with the anticipated release of games. Let me also add that the current game ratings are far superior to those released last year. Assuming that the job market improves, this can only help GME. Yes, GME's larger margins are in used games but you need the traffic offered with the release of highly anticipated new games. Also, I believe that GME's unique game offers still give them a preorder advantage over WalMart, Target, Best Buy,etc.
Natal will be offered later in the year and this could be a very big positive for both the video game publishers and GME specifically.
GME's strong cash flow and low PE present tremendous value to a potential buyer. While one should not purchase a stock based on this alone, you cannot deny that the financials are attractive.
This board has been overwhelmingly negative. Generally this is a good sign for longs as I expect to see a substantial increase in the short position. Any positive news will result in a stronger rebound as shorts will cover to protect their gains.
When you got Wally and Bestbuy the big boys saying used games is a waste of time and you have others going under and closing stores that also sell used games that should tell you something about the used game market overall.
CFO's for the most part do not resign shortly before earnings unless something is up they want no part of.
NOTHING has changed over the past few months with regards to GME sales or guidance they provided so look for at best sideways trading but I would not be surprised to see poor earnings and poor guidance once again and a new 52 week low.
Walmart and Best Buy may have left the market because they couldn't compete with the behemoth in the industry.
I too liked you analysis. I know nothing about video games, but I know what a 16% free cash yield is when I see one. Unless nobody is going to buy used games anymore, I'd say this is a great buy. We'll just have to see. Like you, I'm out under $17.
Game rental model (Gamefly): Netflix contributed to the decline of blockbuster, but that was also aided by its huge debt, which is a problem GME does not share. I dont see the Gamefly business model as a major threat to GME, as games are not like movies. You watch a 2 hour movie and are finished, while with most games people will play them for a much greater period of time, and may wish to return to them in the future. Gamefly has been around for years and still only has a few hundred thousand users, this is not a significant percent of the market. GME's gains in market share from other competitors declining or leaving the used game market has given it much more than Gamefly has taken away. I would still love to see GME buy Gamefly or create its own competing version to get into this market.
Other than that there really arent any other concerns which should warrant this low a P/E. The CFO resigning was to take a better job with WalMart, yet the stock was still beaten down. The company is in good financial shape, has had strong growth until this last year, and is still growing market share, they are paying and have initiated share buybacks. Even if the company is eventually damaged by DLC and is not able to position themselves in that market to profit from it, this is several years away and the company is making large profits in the mean time.
Expectations for earnings have already been lowered, so I expect the company to be about in line with estimates, and after completing the stock buyback, we should begin to see good news again.
GME has been in a severe downtrend for months and has finally reached a major long term support. I do not believe that this $17 level will be broken unless major problems are present in the company, which I do not believe to be the case. This $17 level should be where the downtrend finally ends, and thus I see the stock as a buy in the $17-18 area.
While I am fearful of buying ahead of earnings on the 18th, the odds are just as good that good news will cause the stock to rise dramatically, than bad news will take it down. If GME does miss earnings somewhat, I expect it will only result in a retest of the $17 support level.
Please let me know if I have any of my facts wrong, or your opinions on any of these issues. I am continuing to research the company and am very interested in feedback. (Please no bashers/pumpers...but this board only has a couple of them and I already know who they are so I'll just ignore them. The light traffic is a good sign of sustained bearishness, only the long termers and value buyers are still around at this point!)
Good amount of plagarism in your analysis, but it's mostly correct. DLC will have barriers from the suppliers as well as from the users. Download speeds and capability (need new consoles cycle) will be overcome, so the technical barriers are not what you should be touting as anti-DLC. This gives ammunition to the GME bears who state that DLC technical hurdles are temporary - within 2-4 years. Which is true by the way. I still think that the biggest barrier is that DLC games are going to face a giant down pressure in pricing over disc games, since there is no re-sale value to DLC, and they would have to make up the revenue pressure by selling more games, and the retailers have to sell the consoles. Also, the game suppliers will have to pay for DLC game promotion which the retail channel gives them for free right now with disc games.
GME is the market leader in video game sales and rentals at stores. Video games as a human entertainment continue to grow. The instant gratification of going to a store for a purchase and the high level of support provided by GME staff are two reasons why GME will continue to do well. When the fear that GME will go the way of BBI subsides, the stock price will rise to be consistent with the financial performance.
GME is the market leader and shoppers will go there rather than "also rans" that do not provide diverse inventory and support. That is why Walmart and Best Buy failed to compete against GME for used games.
I also like your analysis. You brought up some really good points about the size of games and the storage capacity of the systems. Plus you listed some cons as well as the pros to investing in this company which is refreshing. Hope you keep posting.
Alex, I think your analysis looks good. Thanks for the hard work.
There are two things I'd like to say though. The download content market will develop more quickly than your think. As usual technology moves ahead, and obsolecence occurs faster than most people can grasp. GME will have to move fast to get a DLC product online that will win the support of their customers in a year or less.
I expect the earnings report to surprise to the upside. Epectations have been set low by GME's comments and the performance of other game co.'s However sales for COD WWII and other popular titles have been great. I think they will have good news to share on the 18th. If not I will wonder what is wrong with their management that they can not make great earnings on the most successful entertainment release in history!!!!
Clearly there are some concerns with GME, or else we wouldnt be getting the P/E multiple we are seeing. Without these concerns GME would probably be trading at 40+ like it was in 2008.
Downloadable content: Obviously the big concern, if companies switch to a download model for selling game content, GME will be left out. I wouldnt expect a large amount of software sales to go to download anytime remotely soon (these games are many GB in size and take forever to download, and storage capacity on the console hard drives is not sufficient to store many. While storage size will increase in the next generation consoles, game size will also continue to increase, and download times should still be prohibitive for major games.
Of bigger concern is how add-on download content will effect used game sales. If I have to pay X$ to download additional content for a game, will this effect my willingness to buy the cheap used game?
While this is a concern, as long as physical copies of games are needed, used game sales should remain. While this will probably begin to impact GME's sales in coming years, the stock price is so heavily discounted at this point to account for this, the risk of a decline in earnings is already priced in. I wouldnt be interested in GME at a 15 P/E at this time, but at a P/E of 8 these risks are already priced in.
GME has already stated its commitment to obtaining a piece of the DLC pie, and the company still has time to adapt. I think its more likely that we see good news in the future to warrant a higher P/E multiple, rather than a continuation of the bearish news we have seen in recent months.