Wednesday, May 7, 2008

an update on gme, subject of a recent negative barron's article

recently, barron's published a bearish story on one of my holdings, gme. i'm not taking any action based on the article, but want to give my "take," as well as my expectations for the stock. shares were recently trading at about 52.

briefly, the barron's article argues that the strong gains for gme will come to a halt this year, based on the already-lofty expectations and the potential for a slowdown in the company's growth rate. the negative story quoted an analyst at Wedbush Morgan (who, not surprisingly, has a hold rating on the stock) and pointed to increasing competition from the likes of bbi and cc as another potential negative catalyst.

i'm not completely dismissing the story, although it lacked any in-depth insight other than pointing out that the stock has had a strong run in recent years and current expectations have focused on games including the latest edition of "Guitar Hero" and the potential blockbuster, "Wii Fit." i am certainly more comfortable with the potential of gme's shares in an environment where there is some skepticism about expectations and valuation, rather than a scenario where every analyst who covers the stock has a buy rating. gs currently has a sell rating on the stock while analysts at wedbush and piper jaffray have hold/neutral ratings.

thus far in 2008, most subsectors of retail have been disastrous due to consumers cutting back on spending because of the us economic slowdown, as well as high prices for gas and other basic goods. but i believe gaming demand remains poised for continued growth, and companies like gme deserve a premium multiple. as opposed to retailers in subsectors such as apparel or housing-related goods, gaming is less likely to see a cutback in spending from consumers. gamers remain a reliable population, in terms of their interest in new games, while the Wii is helping to expand the industry's customer base.

for now, i see further upside in shares of gme, which could push back toward their 52-week high above $60 over the summer. the company's quarterly earnings, expected later this month, could provide a major catalyst as management provides near-term guidance based on initial sales of the immensely popular "Grand Theft Auto IV" title. i'll be watching closely to determine whether tuesday's barron's article offers a valid premonition of a slowdown, or is nothing more than speculation.

long gme, gs

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