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Contributors: Douglas McIntyre Jon C. Ogg

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Thursday, August 17, 2006

GameStop Stock Down Is Just Closer to Another Opportunity

Stock Tickers: GME, ERTS, THQI, ATVI, TTWO

GameStop (GME) stock was down 5.4% at $44.46 on lower earnings and lower guidance today. This is more a symptom of the environment than it is an issue inside the company. The conference call just ended and the upbeat tone from management has helped the stock recover to $45.40. The company did maintain a positive tone throughout the call, although opinions are opinions.

All numbers for earnings here are pro-forma before items and options. The company posted $0.06 EPS (down from $0.14 last year) and revenues of $963.3 million (more than double last year because of the Electronics Boutique acquisition). Same store sales were up 3.3%. These were both a bit soft compared to estimates, but what is hurting is that the $0.20 to $0.22 EPS guidance next quarter is under the $0.24 estimate; it also sees 4% to 6% same-store-sales growth. Its fiscal year guidance of $1.94 to $2.03 is actually a penny higher than prior estimates (and estimate is $2.01). It is also forecasting 7% to 9% same store sales growth for the year, with total sales up 15% to 17% for the year.

Maybe this sales growth number is back-end loaded. Maybe the next quarter guidance is a bit under the street. Maybe, Maybe, Maybe. This company tends to be conservative on guidance, and that really looks to be the case here. What the street needs to remember is that Q2 for anything video game related is the throw-away quarter, and next quarter is a drop in the bucket compared to the full year. Xbox 360 has been getting more titles, and this upcoming PS3 is on a different status each month (currently set for Novemebr 17, 2006 in North America). This PS3 is also outside of next quarter, so GME won't get to benefit from that until the following quarter and this is priced at $499 for the intro model and $599 for the larger storage model.

Gamestop stock looks like it was back up into overbought territory ahead of the earnings because of how Electronic Arts (ERTS) acted after earnings; and what today's stock reaction is doing is getting closer to a level that will be giving investors another chance to get in. It probably isn't quite there, but the old days of this being a low price stock may be over and done. The biggest title maker, Electronic Arts (ERTS), has actually fared well since its last earnings. This really looks like a situation where investors and traders need to let the dust settle, but then it will be worth a good look. This trades at roughly 22+ times forward earnings, and far less than that for the following year. Considering that we have been in a product vacuum for 2 quarters and for maybe one more, there should be many growth opportunities for this company.

There are probably a dozen other reasons that investors might be able to sleep easier. This new price for Sony's PS3 is going to allow other hardware makers to charge higher prices. Madden NFL Football 2007 ships next week. This is in a segment that is definitely in consumer discretionary, but the consumer is not quite as dead as previous reports indicated. The PS3 is priced at a level that the company can offer rebates or price cuts down the road, which it will have to do if the price is too high (even though they already lose money on it). These are just a handful of supporting details, but give this a look after the dust settles and hopefully at a lower price.

If you look at these video game stocks they are all well off their recent lows, even with the added wild card of stock options. Electronic Arts (ERTS) at $51.97 is up from the $40.00 lows. Activision (ATVI) at $14.05 is up from its $10.47 lows. THQ Interactive (THQI) at $27.00 is up from its $18.54 lows. Even the troubled Take-Two (TTWO) at $12.55 is up from its low of $9.06. It doesn't look like the sun is setting on video games any time soon.

Jon C. Ogg
August 17, 2006

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