Why Jim Chanos Shorted Gamestop
Chanos' argument is that the video game retailer will face increasing competition from e-commerce. Similarly, companies like Best Buy (NYSE:BBY) and Radio Shack (RSH) have struggled with online competition from Amazon.com (NASDAQ:AMZN).
The key question is whether the anticipated slide in Gamestop's business has started. If it has, is the trend accelerating?
First of all, management expects the company to earn $3.10 in fiscal year 2012 which means that shares trade for 7 times earnings.
However, revenues are falling quickly. Sales of physical video games are down 20% year over year. New hardware sales declined 34% in the second quarter.
Bears should be careful because Gamestop is heavily shorted by the hedge fund community. Thirty-seven percent of the share float is short despite the fact that short-sellers are paying out 4% dividends.