Here’s an Interactive Game: Watch Short Sellers Get Squeezed in GameStop Stock
Shorting GameStop (GME) shares has been popular and profitable sport for a long time, but lately, those gamers are getting burned. Shares of the video game seller rose some 50% in the past six months even as GameStop turned into one of November’s most shorted issues. There are lots of reasons for those shorts to be nervous now.
The short play on the world’s largest video game retailer seems obvious, at least on the surface. Sales and profits have fallen as more gamers turned to online fun and away from the console-and-software based game systems sold in GameStop’s 6,650 stores worldwide.
But shorts apparently underestimated the breadth of GameStop’s reach. The latest quarterly profits, announced a month ago, showed fast growing digital sales as well as bigger than expected sales in devices. The company has built a niche by selling pre-owned gaming systems and smartphones, and Apple’s (AAPL) new models of iPhones just created more of the older ones for GameStop to sell.
The Christmas selling season also started off well, due to popular new gaming systems and games. In November, GameStop said that “Call of Duty: Black Ops II” was on its way to becoming its best-selling game ever, and it reported record levels of selling for the new “Assassin’s Creed” games too. A strong list of new game releases in early 2013 should keep traffic coming into the stores beyond the holidays. Sales of the new Wii U, released late last month, also should boost revenues, even if it’s not a massive hit.
To succeed long-term, GameStop hopes to convince its store customers to remain loyal even as tangible console games grow obsolete. GameStop has built up its digital outlets with acquisitions to make it a player in high definition games. Selling PC-based downloads in its stores has helped maintain traffic and keep customers from straying to online competitors. A sophisticated customer loyalty program also has proven surprisingly successful, with 75% adaption so far. It bodes well for GameStop’s chances of keeping its store customers as more of its business moves online.
The company has tried to pacify investors with share buybacks and big dividend payments. Its dividend yield now is about 3.6%, and the company still touts strong fundamentals. But the shares trade at a PE ratio below 7, reflecting the difficulties in selling consumer electronics generally. Anyone who invested in Best Buy (BBY) or Radio Shack Corp. (RSH) knows that online competitors like Amazon.com (AMZN) can quickly devastate a bricks-and-mortar electronics business.
GameStop’s massive customer base and variety of selling platforms set it up well in the growing video game industry long-term. Short-term, it’s hard to see a good reason one might expect a big drop in the share price. Perhaps it’s time for those shorts to sweat.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com.