Game Over For GameStop? BofA Turns Bearish On Video Game Retailer

While the struggling retailer of video games and accessories and GameStop Corp. GME deserves credit for "fighting several big structural headwinds" over the years, Bank of America Merrill Lynch turned negative on the stock Friday. 

The Analyst

Bank of America's Curtis Nagle downgraded GameStop from Neutral to Underperform with a price target lowered from $12 to $9.

The Thesis

GameStop's core business of selling physical copies of video games continues to come under pressure from the rise of digital and online sales of the same games it sells in store, Nagle said in the Friday downgrade note.

This trend is likely to continue and result in EBIT attributable to gaming falling from a peak of $638 million in 2015 to $331 million and nearly breakeven in 2021, the analyst said. 

The company simultaneously faces a new threat from another front in the form of "freemium games," especially "Fortnite," which boasts more than 80 million users, Nagle said. These digital games not only represent direct competition to traditional video games, but could result in publishers GameStop relies on to develop their own freemium games, he said. 

GameStop held $1.6 billion in cash at the end of 2018, which should give it enough cash on hand to be debt-free after its last repayment in 2021 while also paying investors a dividend, the analyst said. Yet t the company may be forced to slash or completely eliminate its dividend to preserve cash, he said. 

GameStop is being run by interim CEO Shane Kim, and the company hasn't had a permanent CEO for nearly a full year, Nagle said. The longer it takes to appoint a new CEO, the more difficult it will be for even a visionary and capable CEO to pull off a long-term turnaround, according to BofA. 

Price Action

GameStop shares were down 6.6 percent at $10.82 at the time of publication Friday. 

Related Links:

Pachter: Video Game Stocks Are 'Relatively Recession-Proof'

GameStop's 'Large Cash' Position Keeps BofA On The Sidelines

Photo by Michael Rivera/Wikimedia. 

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