It’s time to face the facts. GameStop Corp. (NYSE:GME) is this generation’s Blockbuster. Earlier this month, Xbox manufacturer Microsoft Corporation (NASDAQ:MSFT) announced Game Pass, a Netflix, Inc. (NASDAQ:NFLX)-style monthly online video game rental service similar to Sony Corp (ADR)’s (NYSE:SNE) Playstation Now.
While Microsoft’s Xbox Game Pass by itself is not enough to tank GME stock and put GameStop out of business, it is the latest in a growing trend toward digital downloads and online offerings, and away from GameStop’s bread and butter of video game disks and physical media. Combine this with continued pricing competition from the likes of Amazon.com, Inc. (NASDAQ:AMZN) and Wal-Mart Stores Inc (NYSE:WMT), and the future of GameStop’s bottom line is increasingly in jeopardy.
Essentially, GME stock is dying the death of a thousand cuts.
Click to Enlarge It’s a trend that you can see just by looking at price action for GameStop stock. GME has been in decline for the better part of the past three years. Since November 2013, the stock has shed more than 55%, with losses accelerating since October 2015 when digital downloads began to gain considerable traction with current-generation gamers.
While GME stock has found some price support in recent months due to projections of improving physical media sales following the successful launch of Nintendo Co., Ltd (ADR)’s (OTCMKTS:NTDOY) Switch console, one system won’t be enough to same GameStop’s bottom line. And, if you’ve frequented a GameStop lately, you can see the company realizes this fact as well, with pop culture and video game wearables and collectables now lining many shelves in a move reminiscent of mall-based F.Y.E. stores.
Despite the declining stock price and threats to GameStop’s bottom line, Wall Street analysts have yet to catch on. According to Thomson/First Call, only four of the 13 brokerage firms following GME stock rate it below a “buy.” Among those four, there is only one “underperform” designation — and even that was a recent development.
But the time for more downgrades may be just around the corner for GME stock. GameStop will step into the earnings confessional on Thursday next week. The consensus is expecting a profit of $2.28 per share, down from earnings of $2.40 per share in the same quarter last year. Revenue is seen slipping 11.7% to $3.11 billion.
In yet another sign of optimism from the brokerage community, EarningsWhispers.com reports a whisper number of $2.31 per share for GameStop’s fourth quarter. Failure to live up to these elevated expectations could prompt downgrades or price-target cuts that could send GME stock lower.
Looking at the rest of GameStop’s sentiment backdrop, it appears that the brokerage community is the last bastion of bullish sentiment. For instance, short sellers are loaded for bear … literally. Following a 2% increase during the most recent reporting period, the number of GameStop shares sold short now stands at roughly 24 million — representing 28% of the stock’s total float.
What’s more, these short sellers don’t appear to be worried about a GME stock rally. Currently, the 24 March put/call open interest ratio rests at an elevated 0.91, with puts and calls in near parity among options most affected by GameStop’s earnings. Beyond earnings, the April put/call OI ratio balloons to 1.71, as puts take command of GME’s intermediate-term backdrop.
Overall, 24 March options are pricing in a potential post-earnings move of about 9.22% for GME stock. This places the upper bound at $26.76, while the lower bound lies at $22.24. A rally to the upper bound would still leave GME stock below resistance at its 200-day moving average, while a decline to the lower bound would breach short-term support at $24 and leave GME vulnerable to breaking below longer-term support at $22.
2 Trades for GME Stock
Bear Put Spread: While GameStop may well post solid figures for the recent quarter, guidance will be the real key to the stock’s post-earnings direction. And the longer-term outlook for GME isn’t pretty. Barring a major development to rekindle the company’s dwindling presence in the video-game market, a continued decline for GME stock seems inevitable.
Those traders looking for a bearish play on GME stock might want to consider an April $22/$23 bear put spread. At last check, this spread was offered at 25 cents, or $25 per pair of contracts. Breakeven lies at $22.75, while a maximum profit of 75 cents, or $75 per pair of contracts, is possible if GME stock closes at or below $22 when April options expire.
Call Sell: Still, GameStop has proven its tenacity in the market for some time, finding ways to hold on despite the growing tide of digital media. Furthermore, solid fourth-quarter numbers could mitigate damage done by poor guidance, leaving the shares to trend sideways for a while longer.
One way to use options to profit from this development is to sell out-of-the-money calls — especially if you own GME stock.
Traders taking a more neutral-to-bearish stance might consider selling the April $28 call. If you already own GME stock, this call sell allows you to offset some of your portfolio losses in the event of continued stagnation, but also allows you exposure to any upside up until the stock trades at or above $28.
At last check, this option was bid at 25 cents, or $25 per contract. A sold call allows you keep the premium as long as GME stock closes below $28 at expiration. On the downside, if GME rallies above $28 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.