Gamestop (GME) reported a strong Q1 yesterday, posting $1.81 billion in sales (vs. $1.7 billion consensus) and EPS of $0.37 (vs. $0.35 consensus). Shares plunged almost 4%, however, as investors wanted more. The short story on GME–and other gaming stocks such as Electronic Arts (ERTS), Take Two (TTWO), and Activision (ATVI)–is that the console cycle has peaked. Citi thinks the shorts are morons:
Sellers pushed GME’s stock down as some contend the current gaming cycle has peaked. These investors have become more emboldened to short/sell stock now that the launch of GTA IV has occurred. We believe this creates a great buying opportunity.
We disagree with the bears as
1) we are still early into the cycle (7th generation consoles represent only 30% of sixth generation systems),
2) we see a very strong title lineup in the back half of this year for both the console and the PC (there are 15 good titles and 10 notable titles in the pipeline), and
3) the music genre and Wii should help accessory sales.
Citi also cites the potential for upside due to forthcoming hardware price cuts and the possibility of an actors strike driving the entertainment-starved masses away from stale TV programming and movies to games:
Given the improving title line-up, high potential for hardware price cuts, and GME’s 25% EPS growth potential for the next couple of years, we maintain our buy rating and $66 target. Furthermore, GME could benefit from the looming actors strike as TV and movie content goes stale. We view today’s sell off as an excelling buying opportunity.
Citi maintains $66 target.
Our questions for Citi (or any helpful soul):
- At what percentage of penetration did the cycle peak last time? (Memory fails us)
- Any evidence that the writers’ strike drove anyone to games? Our understanding is the gamer culture, though huge, is a relatively narrow demographic, one that doesn’t spend much time watching TV.
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