Trade of the Day: GameStop (GME)

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We’ve taken a bearish stance on GameStop (GME) in the short-term following an industry report that game sales at physical retailers are down 15% year over year.

This isn’t actually that surprising. Frankly, GME has always been a bit of a head-scratcher. The business is clearly moving toward digital downloads and yet the company has been able to at least keep growth flat.

You have to hand it to GME’s management, as it has diversified the business into non-Apple (AAPL) Mac stores, Cricket phones and a somewhat confusing game trade-in program to keep cash flowing. However, the core product of physical games is struggling the same way Blockbuster Video stores struggled against Outerwall and Netflix (NFLX).

The digital download business actually sounds very good on the surface. It has been growing for GME and the gross margins are over 50%. However, why would a company like Electronic Arts (EA) give away all that margin to GME for digital downloads they could support directly? The answer is that they don’t want to do that and recently announced a download service through the Xbox console. This seems to be an unstoppable trend among game publishers and will hurt GME in the short and long term.

We like establishing a bearish trade on GME at this point as the stock breaks support at $40 per share and completes a massive, bearish, technical-divergence. The options are a little pricey, but not too bad considering that earnings are coming up next Thursday. We don’t expect GME  to go out of business or anything, but a drop to support at $35 before earnings does not seem unlikely.

‘Buy to open’ the GME September 39 Puts (GME140920P00039000) for a maximum price of $2.25.

John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/08/trade-day-gamestop-gme-2/.

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