GameStop Is an Ideal Value TrapGME) would be a stock with almost 10% YTD gains. Given GameStop’s outdated business model and slowing sales, I don’t think the market has priced in the concerns regarding the company’s future into its current share price.
While my bearish stance hasn’t been profitable, I do believe that GameStop has significant more downside potential, which is why I think investors should short it. Moreover, the recent quarterly report further highlights my fears as GameStop’s growth is slowing down rapidly.
GameStop reported its quarterly numbers yesterday.
While the miss isn’t horrific, GameStop’s guidance did not paint a good picture of the company’s future. GameStop is guiding for Q1 revenue to be down 4%-7% year over year, much below a consensus for 1.3% growth. Net income is expected to plunge to $60.5 million-$66 million from the year-ago period's $73.8 million. Further highlighting the company’s woes is the comps guidance. Same-store sales are expected to be down 7%-9% as compared to the corresponding quarter of last year.
Declining comps is never a good sign and as of now, I don’t see how GameStop will be able to survive. GameStop’s business is on the risk of being irrelevant in the years to come. With the growth of digital sales, the demand for GameStop will fall drastically. And given the recent share price, I don’t think investors are pricing in the potential threat.
Granted GameStop is not trading at a lofty valuation, but the company is a perfect value trap. Investors may be lured by the cheap valuation but GameStop is in troubled waters and I would advise to at least avoid the stock.
GameStop looks to me like an ideal value trap. The company’s business is dying and the growth of the digital platform will further dent its hopes of a turnaround. The stock may appear cheap, but given the potential risks, I think it has a lot more downside to offer. Thus, I think investors can initiate a short position in the stock, but it is definitely not a stock that I would recommend holding.
Published on Mar 25, 2016By Ayush Singh