Gamestop – The Next Blockbuster?

Gamestop (Ticker Symbol: GME) started off 2019 with a bang, giving its investors hope for the first time in years.  The stock rallied off of news that the struggling video game retail chain could possibly be looking to sell itself, spurring over a 30% rally.  However, the euphoria was short-lived after Gamestop reported that they had stopped exploring the potential sale. In early March, they announced a new $300 million share repurchase program but the stock has not reacted positively to the news and has been trading lower since the report.  

On March 8th, 2019,  Bank of America downgraded Gamestop to “Underperform” from “Neutral” rating and lowered their price target on the stock to $9.00 from $12.00. Bank of America cited an “ongoing shift, from disc-based games to digital downloads and subscription content.”  Two weeks later, Alphabet (Ticker Symbol: GOOGLWealth Strength IndexAAPL is Extremely Up and trending Up) caused the stock to slide even further when they announced their new cloud-based gaming system called Stadia.

Gamestop’s stock has been nothing to write home about and has been in the midst of a six-year-long downtrend.  After a positive start to 2018, the stock spent the majority of the rest of the year, trading in a range between $17.00 and $12.00.  In the first quarter of 2019, the stock took off to a good start, rallying over 35% before giving it all back and then some, now currently down over 15% year to date.  

Above is a longer-term weekly chart for Gamestop.  As you can see, the stock ticked to a high for the decade of $54.74 in the fourth quarter of 2013.  Since then, the stock has been making a series of lower highs and lower lows. In late 2015, Gamestop broke below its 100 and 200-week Moving Averages, adding pressure to the share price.    

(Chart above courtesy of ​​)  

Based on a survey of seven analysts offering 12-month price targets, the average price target for Gamestop’s stock is $149.71.  According to that number, the stock is priced at a discount relative to Wall Street’s analysts and could be considered undervalued around current levels near  $10.31.

Gamestop’s story reminds me of a similar story: that of Blockbuster Video.  The one-time home video giant went bankrupt in 2010. Blockbuster lost its luster when on-demand and online streaming services like Netflix, took the majority of the market share.  People lost interest in going to brick and mortar locations to rent videos when they could rent and watch movies from the comfort of their homes with no worries of getting a late fee!

Unfortunately, Gamestop may be poised to suffer that same fate. The video game retailer has been reducing its physical footprint by closing poorly performing locations: more than 130 of them in 2017 and just under 100 in 2018. The ongoing shift from disc-based games to digital downloads will continue to put pressure on Gamestop’s core strategy.  GameStop reports quarterly earnings Tuesday after the bell and investors should look to the earnings conference call for their next move.  



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