Goldman Sachs analyst Matthew J. Fassler told investors in a research note that Nintendo's latest portable gaming device (described here by Steven Mallas), which allows users to download games electronically, poses a "tangible early threat" to the physical sale of video game CDs and cartridges. He wrote that "While content will be limited at first, we believe it will likely ramp very quickly."
The Associated Press headline on the story was "Analyst: Best Buy video-game sales vulnerable," but I would say GameStop (NYSE: GME) is in much more trouble because selling video games is essentially GameStop's only business. While the decline of CD sales hasn't ruined Barnes & Noble (NYSE: BKS), it has absolutely murdered Trans World Entertainment (NASDAQ: TWMC), the operators of mall-based music stores like f.y.e.
It's too early to say when video game downloads will wreak havoc on brick and mortar video game stores, but I don't think there are too many people who would say that that will never happen.
Even with the stock near its 52-week low at 16 times earnings, that's a risk that long-term investors will want to pay close attention to.
GameStop (NYSE: GME - option chain) shares are falling today after data from market researcher NPD group showed that U.S. video game sales growth is slowing. NPD reported that U.S. retail sales of video game hardware, software and accessories rose only 9% in August which is much less than July's 28% growth rate. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on GME.
This morning, GME opened at $42.08. So far today the stock has hit a low of $40.41 and a high of $42.08. As of 12:35, GME is trading at $41.32, down $1.38 (-3.2%). The chart for GME looks bullish and S&P gives GME a positive 5 STARS (out of 5) strong buy ranking.
For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in 5 weeks as long as GME is below $50 at October expiration. GameStop would have to rise by more than 21% before we would start to lose money. Learn more about this type of trade here.
GME hasn't been above $50 since May and has shown resistance around $46 recently.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in GME.
Investors have to find this frustrating. I know I hate it when this happens to one of my stocks. GameStop Corp. (NYSE: GME) issued its Q2 numbers today. The numbers were a thing of beauty for the most part. Yet, the stock goes nowhere. And yes, I know this is a bad market day, but still, I thought a little pop was in order. As it is, shares are down about 1% as I write.
Sales increased almost 35% to $1.8 billion. The bottom line saw an increase of well over 100%, coming in at $0.34 per diluted share. According to this article, expectations were for $0.28 per share. So, do you see where I'm coming from? Expectations were beat, and growth was stellar... come on, investors, give the stock a bid! Granted, the article mentioned something I noticed as well: the gross margin declined. Okay, it declined. But same-store sales simply rocketed like a spacecraft at a growth rate of 20% during Q2. That has to be worth something ahead of the holiday-selling season. Games from Electronic Arts Inc. (NASDAQ: ERTS), Activision Blizzard, Inc. (NASDAQ: ATVI), and Nintendo Co., Ltd. (ADR) (OTC: NTDOY) powered the quarter. And guess what? They're going to power the next two quarters, too. We have new iterations of Guitar Hero, Call of Duty, and Rock Band to look forward to. Oh, and Lego Batman. Seriously, don't discount that latter title. A lot of Sony Corporation (ADR) (NYSE: SNE) PlayStation 3s and Microsoft Corporation (NASDAQ: MSFT) Xbox 360s will move off shelves, and that little system called the Wii is going to be the hottest console again this Christmas. Oh, and then there's the DS. GameStop sells 'em all.
GameStop beat its own guidance, and I think it has a great chance of continuing to beat its own guidance in the near future. That aforementioned article mentions that investors are concerned with slowing growth in the video-game universe. Okay, point well taken, I suppose. But GameStop is such a great brand in its sector, and consumers have come to know it as the go-to place for entertainment software. And as hardware continues to become cheaper, and as the installed user base rises, GameStop should benefit. The shares haven't done well this year, declining over 30% on the year-to-date timeframe as of this writing. The stock is much closer to its 52-week low than to its 52-week high. It's weak. But, I also think it's cheap. If you have a long time horizon, you may want to check GameStop out. If you're a quicker trader, you may want to wait for the stock to come back about $5 toward its 52-week low (if that happens).
Disclosure: I own Activision Blizzard; positions can change at any time.
The Wall Street Journalreports that Best Buy (NASDAQ: BBY) is test piloting the sale of used video games at its Canadian stores, with an eye toward expanding the program into the United States. While the company says it's too early to say whether the plan will take off, Best Buy's head of international relations said on a conference call that "We're very, very, very hopeful that this will be another avenue of increasing our relationship with the consumer generally."
What a nice way of saying "making more money." The used game business carries substantially better margins than retailing new games, and the frequency of trade-ins reduces inventory costs. Right now the leader in used games is GameStop (NYSE: GME), but you have to think a big push from Best Buy could take some market share in this profitable category. Alternative GameStop's small size and more knowledgeable staff could make it more appealing to consumers than Best Buy -- the two stores have locations in many of the same malls.
Even after its recent price decline, GameStop investors should be taking a hard look at the durability of the company's competitive advantage. The company has so far done exceptionally well competing with big box retailers, a testament to tremendous management and a strong concept. But it's a battle that's likely to continue and, looking further into the future, you have to wonder whether higher-quality digital delivery of games could hurt the company.
In case more evidence was needed that Microsoft (NASDAQ: MSFT)'s Zune is a bust, GameStop (NASDAQ: GME) has decided to stop selling the MP3 player, citing the fact the product "didn't have the appeal" that it had hoped it would. GameStop has pulled the inventory from its stores and will offer the Zunes on its website until it has cleared out the entire inventory.
In response, Microsoft told the Wall Street Journal that the Zune sales "have seen good momentum" of late and that the company had seen "great response to our spring release." Translation: "Believe us not your lying eyes."
The failure of the Zune and similar iPod wannabes indicates that Apple (NASDAQ: AAPL) may have a bigger moat than many had expected. So far no one has been able to dethrone the iPod and as stores like GameStop stop carrying competitors, Apple's competitive advantage will strengthen.
So let's take a look at the numbers. Earnings per share came in at 37 cents for the quarter, two cents above the 35 cents that analysts had been expecting to see. At 37 cents per share, the company showed a pretty remarkable 151.4% earnings growth from the same period last year.
Revenue figures were also very respectable for the company, with a reported $1.813 billion (a 41.8% year over year increase), and well above the $1.72 billion estimate. Same-store sales got a boost of 27.1%, and if you take a look at new videogame software growth, that figure is an amazing 72%.
CNBC reports that the video game industry is making progress in its efforts to offer downloads of high-quality games over the internet. Nintendo has introduced WiiWare, which lets users download games for the Wii from independent publishers. Developers set the price -- far cheaper than the high-budget games put out by the big publishers -- and Nintendo takes a chunk of the revenue. CNBC adds that "Digital delivery of all forms of entertainment is widely considered to be a foregone conclusion. Only the timeframe is in question. Not only will publishers have to learn to adapt, but game retailers such as Gamestop (NASDAQ: GME) will have to figure out how to compete directly with companies that are also clients."
What happens if the downloading trend takes off as most experts assume it will? The story of Trans World Entertainment (NASDAQ: TWMC) could be a harbinger of things to come if Gamestop is unable to adapt. As the number-one operator of mall-based CD stores, Trans World has seen its sales and profitability plummet -- the shares have declined from over $13.00 in 2005 to the current price of $2.60. The market was very late in pricing in the disastrous effects that the MP3 would have on the brick-and-mortar industry.
Maybe Gamestop can adapt. But with a P/E ratio of over 30 for a company whose business model will have to change drastically over the course of the next decade, investors may want to keep in mind the collapse of Trans World Entertainment.
So Take-Two Interactive (NASDAQ: TTWO) is about to have one heck of a week. Tell me if I'm wrong, but I'm willing to bet everyone reading this knows that today is launch day for Grand Theft Auto IV on the Sony (NYSE: SNE) PlayStation 3 and Microsoft (NASDAQ: MSFT) Xbox 360 consoles. And I'm sure there were many hardcore fans at Best Buy (NASDAQ: BBY) and GameStop (NYSE: GME) today, ready with cold-hard-cash in their hands to snag the software; in fact, this article talks about how some stores were open at midnight to satisfy the pent-up demand (remember, this title was delayed). And Douglas McIntyre discussed the game earlier today as being a potential barometer in terms of consumer confidence.
With all this incredible buzz, with the projection that GTA IV might move close to 10 million discs this year, should you be interested in taking on some Take-Two stock for your investment portfolio? The answer for me is no, Take-Two is not a buy here. Remember that we still have the whole arbitrage game going on with it since Electronic Arts (NASDAQ: ERTS) wants to buy the publisher; also recall that Take-Two is gunning for a higher offer and purposely delayed further negotiations until after the release of GTA IV. I sold my position when the whole buyout offer was made a while ago, and I'm still glad that I did -- for me, the trade was over at that point, and I was happy to simply own my Activision (NASDAQ: ATVI) shares.
Nathan Slaugher sees video game retailer GameStop (NYSE: GME) benefiting from several popular new video software titles. Here's the advisor's latest review from his Half-Priced Stocks newsletter.
"The shares of have staged an impressive rally, vaulting over 30% since the beginning of March. Most of those gains followed the firm's fourth-quarter earnings release, which showed more of the same phenomenal growth that we've grown accustomed to.
"Driven by brisk demand for popular software titles like Activision's Call of Duty 4 and Electronic Arts' Rock Band, same-store sales jumped 17.4%, pushing overall revenues ahead nearly 25% to $2.9 billion.
"Meanwhile, despite the quarter being one week shorter, earnings soared 46% to $190 million, or $1.14 per share -- ahead of optimistic guidance that had been raised not once, but twice.
I read an interesting article on tax rebates and vacation spending. A lot of theories are floating around concerning the exact stimulative effect President Bush's $168 billion program will have on the ailing economy. If the article I read is correct, then the vacation industry may be a big beneficiary.
An expert on the tourism sector, economist Steve Morse of the University of Tennessee, suggests that timing is the key here. Since the rebate monies will be flowing at the same time as Americans start to plan and go on their vacations, Morse believes that economic activities related to enjoying time off will see a tangible boost. In fact, he further states that vacations are something that people might not necessarily deny themselves, even in times of recession. He points out that people might tend to take on a bit of debt to fund vacations since they see it as a "right of life," as he puts it.
I see the logic, especially the "right of life" issue. Not only are vacations important to everyone, but they are sort of comparable to toys at Christmas -- know how they say that people won't stop giving toys to their children even during hard times? Well, vacations are like toys for adults (and if the adults have children, as many do, then vacations are like toys for adults and children). And adults will not cease gifting themselves during the summertime.
You can call on numerous issues for today's big market rally. Goldman Sachs Group, Inc. (NYSE: GS) led the brokerage firms higher after beating earnings expectations, and that may have been equally as important to traders as today's three-quarters of the way interest rate cut when it took Fed Funds down to 2.25%. Many traders were looking for a full 1% rate cut on the Fed Funds and Discount Rate. The Fed even delivered a cut after seeing a strong PPI number that was much more realistic than the CPI number of last week.
DJIA 12,392.66 (+420.41; +3.51%)
S&P500 1,330.74 (+54.14; +4.24%)
NASDAQ 2,268.26 (+91.25; +4.19%)
10YR-TBond 3.451% (+0.137%)
The list of 52-week lows is far smaller on a giant rally like this, but as usual there are always some feature stocks that can't manage to rally. There were some others noted this morning that just failed to participate, mostly from analyst downgrades.
Despite a tumbling economy where recession fears gain ground each day, video games demand is rising for at least one retailer. The good times are rolling for GameStop Corp. (NYSE: GME), which reported this morning that its fourth-quarter profit jumped 46%.
GameStop's quarterly profit rose up to $189.8 million, or $1.14 per share, compared with $129.8 million, or 81 cents per share in the same period last year. Analysts, on average, were waiting for the company show earnings of $1.12 per share for the quarter.
Taking a look at the company's quarterly revenue, we see a growth of 24% to $2.9 million. For this period, the retailer counted strong sales for its Guitar Hero III and Call of Duty 4 video games. Quarterly sales numbers matched analysts' predictions, according to Thomson Financial.
Goldman Sachs analyst Matthew J. Fassler told investors in a research note that Nintendo's latest portable gaming device (described here by Steven Mallas), which allows users to download games electronically, poses a "tangible early threat" to the physical sale of video game CDs and cartridges. He wrote that "While content will be limited at first, we believe it will likely ramp very quickly."
The Wall Street Journal 
In case more evidence was needed that 
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Despite a tumbling economy where recession fears gain ground each day, video games demand is rising for at least one retailer. The good times are rolling for 
Is the market always right?
Comfort Zone Investing: How this all might play out
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