Thursday, May 22, 2008

gme (II)

forgive me if i repeat a few items from the first gme post today. the stock's selling off, despite a good reported quarter. indeed, high expectations were a hinderance this time for gme. however, with the company's conference call over, shares of gme are at least attempting a rally off their lows from early this morning. after listening to management's comments, i'm on the fence about adding exposure to gme; although i'm not selling what i have.

during gme's conference call, management went over the strong sales and earnings numbers announced this morning. more importantly for investors, the company detailed its expectations for the rest of 2008. management said that it expects to open 550 to 600 new stores during the year -- half of which will be outside of the U.S. -- and also that it is confident about growing earnings per share at a 25% clip over the next two years. the company's used-game business continues to be a positive focus because of the higher margins generated by selling used or refurbished titles.

overall, the conference call was resoundingly positive, with management putting significant effort into reiterating its confidence that the company is doing as well as it ever has. the majority of analyst reports released today have also retained a bullish stance on gme, although they acknowledged that guidance could have been more bullish.

management didn't offer much in the way of new titles that could drive sales growth beyond its guidance for 2008. instead, they pointed out that the top 25 best-selling games were spread across seven different platforms (indicating just how diverse gme's sales are).

but the fact is that in order for the company to surpass expectations, there needs to be some big games to drive the sales momentum. it's true that its hardware base (gaming consoles) is positioned to drive the company's continued strength in video-game sales, but the high expectations for gme mean that upside will only come if it significantly beats estimates. today's selloff is partially a result of the market not being able to make a case for upside to sales and earnings estimates when there isn't a high-profile title like "Halo 3" (which was released in the fall of 2007) to look forward to.

however, these concerns aren't new. in fact, it has been said that a negative story in Barron's could help the stock by creating some skepticism. but judging by the fact that shares moved lower today on strong results, there's a valid argument to be made that the high expectations are making it difficult for investors to see a big gain going forward.

shares of gme rallied off their lows throughout the day as the conference call provided no additional negative news and analysts defended the results.

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