GameStop Corporation: Buy Trade – Position Open April 7, 2017 1269

Description

GameStop Corp. (NYSE:GME) is a video game retailer. The Company distributes video game hardware, physical and digital video game software, video game accessories, as well as mobile, consumer electronics and other merchandise through its stores. The Company’s segments consist of retail operations, engaged in the sale of new and pre-owned video game systems, software and accessories. The stores sell various types of digital products, including downloadable content, network points cards, prepaid digital, prepaid subscription cards and digitally downloadable software and also sells certain mobile and consumer electronics and collectible products. Its Technology Brands segment includes its Spring Mobile and Simply Mac businesses.

Investment Action

We are bullish on GME on the back of the company’s strong financials, near term catalysts and their transition plans gaining traction. We believe that while GME may be facing headwinds in its core product lines, the share price is unfairly punished and ignoring several positive catalyst on the horizon.

  • Shares of GME have tumbled more than 20%. From their YTD high of USD 26.50 to USD 21.84. GME signaled that their core segment, video game sales, continued to fall yoy. As more and more gamers and gaming companies transition to digital sales, GME’s core business segment is threatened. Furthermore sales cycle of current generation of gaming consoles may have peaked, with the Playstation 4 and Xbox One released in 2013. Many gamers who are interested in purchasing a gaming console would likely have already bought one. Furthermore, Microsoft announced plans to roll out a Netflix like service, where for a subscription price, gamers would be able to download and play games on the Xbox One. If successful, GME would face further downward pressure as gamers cut out the middleman and purchase games directly from the companies themselves.
  • Catalyst to revive the business. We believe that there are certain near term catalyst this year that might help boost GME. Firstly, the Nintendo Switch, Nintendo’s new handheld console, was released on 3 March 2017, and was met with very positive reviews. The Switch sold nearly 331,000 units in its first 3 days in Japan and is facing supply issues in the USA. This is likely to translate into good hardware sales numbers in the next quarter results.Secondly, Xbox Scorpio, Microsoft’s Xbox refresh for the current generation, is estimated to also be released later this year, although no specifics have been given yet. Initial looks at the specs of the Xbox Scorpio had glowing reviews regarding the console’s capabilities and when it is released, will likely drive gamers to stores to purchase. As such, we believe that despite headwinds, 2017 might show GME posting better than expected numbers.
  • Transition plan. Finally GME is transitioning to other fast growing segments. Sales of Apple products, AT&T post-paid services etc through their Spring Mobile and Simply Mac stores have surged 52% yoy. Collectibles, toys and miniatures sales have also been booming, with sales up 60% yoy and projected to grow another 30% in 2017. Both these segments are also higher margin businesses than GME’s core video game segment, which should help GME gross margins as the company looks to increase revenue contributions from these segments.

Key Points:

  • Technicals. GME has been stuck in a striking downtrend since November 2015 where it fell from a high of 47.48 to a low of 20.10 in November 2016. However, we are seeing some kind of a rebound playing out now.
  • There seems to be a pattern when price gaps down noticeably into oversold territory (RSI below 30), when bullish price action surface, the short term rebound would be strong enough to recover and close the gap eventually. For instance, on 2 November 2016, price gapped down 12% resulting in the RSI dipping lower to 14(extremely oversold), once the recovery took place, price eventually rebounded back higher and closed the gap. Similar price action happened again on 13 January 2017, when price gapped down 9%, taking the RSI down with it to 31(oversold), the recovery was quick and strong as it closed the gap subsequently on 3 February 2017.
  • Most recently, price suffered a staggering loss on 24 March 2017, resulting in a 10% gap down on the day with the RSI moving into oversold territory again at 24.5. The subsequent bounce off the 20.50 support area is currently lifting price up, in the midst of filing the gap, exhibiting the similar price action of recovery. As long as the 20.50 – 20.10 support area holds, then the current recovery phase from the sharp selloff since 24 March 2017 should fully retrace the loss where buyers aims to fill the 23.96 gap. If history is any indicator, then we can expect the current recovery to take out the 23.96 gap and even retest the 25.35 resistance area.

GME daily chart

1

Resistance 1: 23.96 ; Resistance 2: 25.35

Support 1: 20.50 ; Support 2: 20.10

  • GME currently trades at a PER of 6.38. In comparison, Best Buy Co Inc (NYSE:BBY) is currently trading at 12.78. The company has a gross margin of 24.2% on the video game sales segment and a gross margin of 68.1% and 34.7% for the Tech Brand and Collectibles respectively. Its total gross margin is about 35%. The company has set a goal to transition to video game sales making up 50% of total sales and has managed to achieve non video game sales of 36.9% in its latest earnings release, up from about 24% in the previous year. The company pays a 6.96% dividend and is generating enough Free Cash Flows to cover the dividend at the moment. Given its near term catalysts and transition to higher margin businesses, we believe that its current PER is too low and hence believe that GME Under Valued.
  • GME’s core segment is still responsible for the vast majority of its earning at more than 60% and they are likely to continue to face downward pressure in the future as more companies and gamers transition to digital downloads rather than physical sales. If the company is unable to sustain its transition or if gamers move to digital faster than expected, GME’s current valuation is likely to face greater downward pressure.

2

Important Information

This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.

By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.

The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.

Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.

This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.

Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.

Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.

Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.

To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.

The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.

This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.

This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.

IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE

Where the report contains research analyses or reports from a foreign research house, please note:

  1. recipients of the analyses or reports are to contact Phillip Securities Research (and not the relevant foreign research house) in Singapore at 250 North Bridge Road, #06-00 Raffles City Tower, Singapore 179101, telephone number +65 6533 6001, in respect of any matters arising from, or in connection with, the analyses or reports; and
  2. to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, Phillip Securities Research accepts legal responsibility for the contents of the analyses or reports.
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

Get access to all the latest market news, reports, technical analysis
by signing up for a free account today!