PlayStation 5, New Xbox Are Headwinds For GameStop: BofA

GameStop shares have are up 219% in the last six months, but one analyst thinks the gains will be short-lived.

The GameStop Analyst: BofA Securities analyst Curtis Nagle reiterated an Underperform rating on GameStop Corp GME with a $1.60 price target. 

The GameStop Takeaways: NThe three reasons shares of GameStop have risen are optimism over the console cycle; a digital revenue share agreement with Microsoft Corporation MSFT; and a large stake of shares bought by Chewy Inc CHWY co-founder Ryan Cohen, Nagle said in a Monday note.

The next console cycle from Microsoft and Sony Corporation SNE is a headwind for GameStop, as it “accelerates digital disintermediation,” the analyst said.

Related Link: Analysts Aren’t Impressed With GameStop’s Quarter Or Future

The proportion of games downloaded digitally has increased to over 50%, far ahead from the 10% at the start of the last console cycle, he said. 

The digital-first console models could hurt GameStop’s “highly profitable pre-owned gaming business,” Nagle said. 

The deal with Microsoft might only increase gross profits in the U.S. by 1.4% to 5.5%, the analyst said.

The move in GameStop shares on the deal was an overreaction, he said. 

“Several other retailers (BBY, WMT and TGT) are included in the Xbox All Access program that is a key part of the partnership outlined by GME in its press release.”

Nagle said he does not believe the partnership will be “large enough to offset significant gross profit dollar losses in key segments such as pre-owned gaming.”

GME Price Action: GameStop shares were down 8.93% at $13.67 at last check Monday. 

Benzinga’s Take: GameStop is a physical retailer trying to shift to digital sales. While the console cycle could provide some upside, the shift to digital is a major negative for GameStop.
Even with several analyst upgrades, shares of GameStop are trading above analyst price targets and may have moved up too high on limited optimism.

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