Gamestop (GME), recently downgraded at Goldman Sachs, has at least one fan. Citi disagrees with Goldman on the two fundamental premises cited in its downgrade: that the gaming industry is slowing, and GME will suffer from “limited title visibility.”
Specifically, Citi thinks that pessimism over 2H08 title releases is overblown:
…in our view, we see 17 major and 10 notable titles. Software growth should also benefit from hardware price cuts that are likely in the next few months. Further, the platform cycle is in transition from the high ASP hardware phase (characterised by higher revenue, lower margin) to the lower ASP software cycle (lower revenue, higher margin) which should lead to acceleration in corprorate margins and rapid 25% earnings growth.
Citi also sees a silver lining in the forthcoming Screen Actor’s Guild strike. As the masses look for a diversion during this period, they may turn to gaming. Citi’s bottom line:
We maintain our Buy rating and $66 target price, while taking this opportunity to add GME to CIR’s Top Picks Live list due to: 1) improved title visibility, 2) potential for hardware price cuts, and 3) PS3 momentum.
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