By Miriam Gottfried
Could GameStop (GME) be the next Netflix (NFLX)?
The company is facing a similar digital transition as it invests in new platforms to complement its packaged media and leverages proprietary information to offer the right content at the right time, according to research by Janney Capital Markets.
With this in mind, Janney analyst Tony Wible sees 10 reasons to own GameStop:
1. Loyalty: GameStop added over 8 million users since its October debut, allowing it to leverage this data to boost digital efforts and improve profitability.
2. Digital Investments : Kongregate, Spawn Labs, Impulse, and Gamestop.com allow GameStop to address the four areas of digital gaming : social/mobile, console/PC streaming, downloads and DLC.
3. Hardware Trojan Horse: Leveraging its refurbishment expertise, GameStop is now planning to refurbish tablets, adding a new product SKU and allowing it to establish an installed base for its digital products.
4. New Product Cycle: The release of the Nintendo 3DS and upcoming launch of Sony’s NGP could generate 14 cents per share in the first year and set the stage for morel growth. A new Microsoft device could be announced at E3 for 2012.
5. Cash Flow and Buyback: The company has purchased 17.7% of its shares in the past 15 months and is on pace to purchase an additional $100 million per quarter.
6. LBO Potential: With its low debt ($250 million), stable free cash generation (greater than $400 million per year), and low valuation, GameStop could be taken out at a $30 price point and still generate almost 40% internal rate of return for a private equity buyer.
7. Riggio Overhang and Management Responsiveness: Leonard Riggio has liquidated most of his GameStop position, which reduces annual selling pressure on the stock. New management has been more responsive to shareholders.
8. Short Ratio: With a 26% short ratio, quite a few short sellers are already loosing money on the trade and eventual cover could provide a boost to its share price.
9. Holder Concentration: The top 15 holders own 72% of the company and 66% have increased their position in the past year, which could force a short squeeze.
10. Technical Break-out: According to Janney’s Technical Analyst, Dan Wantrobski, GameStop’s formation could result in a break-out and reach the $26 to $28.
GameStop closed up 6.5% at $25.36 and is trading flat after-hours.
