By Dan Gallagher
With video game sales in a slump for the year, and competition
rising in the used game space, investors have punished GameStop
Corp. (GME), pushing its stock to its lowest valuation level in at
least five years.
The stock has been trading at about 9.5 times estimated earnings
for the next four quarters. According to relative valuation data
from Thomson Reuters, that's about 53% below its average valuation
over the last five years. It's also one of the lowest
price-to-earnings ratios among other specialty retailers.
GameStop shares have also under-performed the strong run-up in
the broader market over the last six months -- losing more than 10%
compared to the 30%-plus gain for the Nasdaq.
Wedbush Morgan upgraded GameStop to an outperform, or buy,
rating Thursday, citing the company's low valuation and upside
potential.
"We believe that GameStop's current valuation is compelling, and
we expect the company to benefit from several near term catalysts,
including hardware price cuts, a much improved software release
slate, and much easier industry sales comparisons," Wedbush analyst
Michael Pachter wrote in a note to clients Thursday.
Shares of GameStop were trading up 2.9% at $27 by midday
Thursday.
Video game sales have been in a sharp slump for the last six
months, as the industry grapples with the economic downturn as well
as difficult comparisons to last year, when several of the hottest
titles came out early in the period.
Pachter and other analysts widely expect September sales to show
an improvement, thanks to big game releases such as "The Beatles:
Rock Band," "Guitar Hero 5" and "Need for Speed: Shift." Also,
console makers Sony Corp. (SNE), Microsoft Corp. (MSFT) and
Nintendo (NTDOY) have all cut the prices on their devices.
The NPD Group is expected to report video game sales for the
month of September on Thursday, Oct. 15.
Another pressure for GameStop has been growing competition in
the used game category - which offers much higher margins than new
game sales. Retail giants Wal-Mart (WMT), Toys "R" Us Inc. and
Amazon.com (AMZN) have launched used-game trade-in services this
year.
Pachter believes GameStop will maintain much of its business
despite its new rivals, because much of the trade-in business comes
from young men who need used game credits to afford newer
titles.
"We estimate that unemployed boys [most boys under 18] make up
the bulk of GameStop's trade-in customers, and the company has a
competitive advantage insofar as it encourages teenagers to visit
and stay in its stores," he wrote. "This is not true of Wal-Mart or
ToysRUs, and we think that GameStop's openness to this core
customer group will provide a competitive advantage for years to
come."
Wall Street was already bullish on GameStop. Out of the 17
analysts covering the stock, 16 now rate the shares as a buy,
according to Thomson data.
-By Dan Gallagher; 415-439-6400; AskNewswires@dowjones.com