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Shares of GameStop (NYSE: GME ) hit a fresh 52-week high yesterday, after Janney analyst Tony Wible issued a bullish note singling out the 10 reasons to own the video game retailer.
I don't see it that way. GameStop's stock is still trading 60% off its 2007 high, and there is little reason to believe that the company will be as relevant in the digital distribution model that the industry is moving toward as GameStop was in the bricks-and-mortar realm.
Let's go over the flaws in Wible's bullish arguments.
Wible points out that GameStop has signed up more than 8 million users to the largely free PowerUp Rewards customer loyalty program it launched last year. So? Didn't Blockbuster have contact information for tens of millions of couch potatoes before filing for bankruptcy?
2. Digital investments
GameStop is trying to slip its dinosaur bones into a new body with recent digital gaming acquisitions. It is the right approach, but financial journalists playing this up as a shot for GameStop to be the Netflix (Nasdaq: NFLX ) of gaming are either naive or missing the bigger picture. Are they not aware that Valve's Steam and hungrier upstarts are already out there?
This isn't Hollywood, where fragmented movie studios and home theater appliance makers didn't come together until Netflix figured it out for them. Companies have their own ecosystems. Apple (Nasdaq: AAPL ) doesn't need anybody else to man the App Store it uses to feed more than 100 million iOS-powered gadgets. Why should Microsoft (Nasdaq: MSFT ) share the wealth of its successful Xbox Live marketplace with a middleman? Activision Blizzard's (Nasdaq: ATVI ) revamped Battle.net this past summer, so that it would be its own gatekeeper.
3. Hardware trojan horse
GameStop's plan to sell refurbished tablets -- or possibly introduce a dedicated gaming tablet -- isn't going to change the fact that the companies behind the operating systems are the ones that control the digital distribution.
4. New product cycle
Every few years, the big three hardware players refresh their product lines. We saw it in the handheld space with last month's 3DS debut. Microsoft and Sony (NYSE: SNE ) also rolled out motion-based controllers to breathe new life into their console platforms late last year.
This may all be true, but GameStop's leanest margins come from hardware, which accounted for a mere 7% of last year's gross profit. The thicker markups come in software and used games and gear.
Have you seen the 3DS? There are some flagship games, but its neater features are the ability to download 3-D movie trailers or stream Netflix. GameStop will be less relevant there. Besides -- after seeing used video game products account for 26% of the revenue mix but 46% of the gross profit -- why are GameStop bulls not worried that you can't resell digital downloads?
5. Cash flow and buyback
GameStop generated cash flow in excess of $590 million last year, and it's been aggressive with buybacks. There's nothing to knock on either front, but it's important to note that healthy cash flow is the byproduct of a store model that is unlikely to last. Blockbuster stores were once cash cows. Really.
6. LBO potential
GameStop's juicy cash flows and cheap valuation make it an attractive private equity buyout target, but don't these firms also buy companies that they feel they can flip for even more later?
GameStop doesn't fit the bill. Private equity has seen the error of buying CD stores, video rental chains, and now bookstores as traditional media caves to the digital revolution. Video games are next.
7. Riggio overhang and management responsiveness
Wible argues that chain founder and Barnes & Noble (NYSE: BKS ) chairman Leonard Riggio has cashed out of most of his GameStop position. Wible also feels that new management is more responsive to investors.
This would be great if GameStop has growth catalysts cooking, but digital sales accounted for just 3% of revenue last year, so these won't be moving the needle anytime soon.
8. Short ratio
Longs love shorts, and with 26% of GameStop's shares sold short it does open the door to a short squeeze. Once again, what's the driver to trigger that kind of rally? If a bullish Janney note or overbidding everyone else for digital acquisitions are enough to send the shares to a new 52-week high, gravity can also cut the other way just as easily.
9. Holder concentration
With GameStop's 15 largest holders owning 72% of the company, the thin float can move shares higher in a hurry. But investors who have seen their investment cut in half over the past few years know that this is a two-way street.
10. Technical break-out
Janney's chartist sees the potential for a technical breakout. These technical swings may be lucrative in the short run, but fundamentals rule the long run. Even some of GameStop's most ardent bulls are unsure of where the company will be a in a few years.
Would you be a buyer or a seller of GameStop here? Share your thoughts in the comment box below.