Sell-Side: GameStop Faces Increased Threat From Digital Mix Shift

Despite the steady rise of popularity in video game culture, retailer GameStop Corp. (NYSE: GME) appears to be on its last life.

The Analysts

• Jefferies analyst Stephanie Wissink maintained a Buy rating on GameStop with an $18 price target.  
• Credit Suisse analyst Seth Sigman maintained a Neutral rating and lowered the price target from $15 to $13.
• Wedbush analyst Michael Pachter maintained an Outperform rating and lowered the price target from $19 to $18.

Credit Suisse On The Sidelines 

GameStop's mixed third-quarter results demonstrate continued challenges within the sector, Sigman said in a note. The company reported earnings of 10 cents per share, aided by lower taxes and depreciation.

Overall results revealed minimal profit flow on core sales growth, combined with slowed sales and weak pre-owned trends, the analyst said. 

“We remain on the sidelines as we balance risks of declining cash flow of the core business with upside risk/optionality from further strategic alternatives (that process is still ongoing) and very low current valuation.”

Wedbush: Digital Downloads Hurt GameStop

GameStop’s sales were below forecast, inhibited by the acceleration of digital downloads and the decline of physical purchases, Pachter said in a note. 

“The company called out 'Call of Duty' and 'sports titles' as the culprits, and we believe that 'Call of Duty,' EA’s 'Madden NFL 19,' EA’s 'FIFA 19,' and Take-Two’s 'NBA 2K19' saw year-over-year increases in digital downloads. We suspect that the acceleration of downloads is attributable to attractive premium priced SKUs that offer 'season passes' for downloadable expansion packs.”

Jefferies Evaluates A Possible Sale 

Per management, GameStop will likely refrain from filling a CEO position until a further review is completed, Jefferies' Wissink said in a note. 

“The divestiture of the tech brands segment removes a deal hurdle; reselling and franchise rights agreements have stiff change of control provisions," the analyst said. "Without the tech brands, GME is a much more attractive takeout candidate and has greater LBO capacity." 

With a sale value of $700 million used for debt paydown, roughly $48 million in interest expense savings is implied — exceeding estimated free cash flow in the tech brand, Wissink said.

“The offsetting net cash and reduced risk should be value accretive to the equity on a sustained basis. In order to convince the equity market of incremental value, we need to see evolutionary strategies take hold.”

Price Action

GameStop shares were down 5.8 percent at $13.80 at the time of publication Friday. 

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