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Short Sellers Circle Around Gamestop

January 26, 2012 | About:

Nintendo's weak results have been driving down shares of Gamestop (NYSE:GME) today.

Legendary short seller Jim Chanos has called GME a value trap. In October, Chanos gave a presentation where he panned shares of GME.

In an interview with Forbes Chanos said, “It is cheap. Boy is it cheap. But boy is it in a bad business.” As more games move to digital, prices fall, margins shrink, competition increases and Gamestop’s trade-in used game marketplace flounders. “This is one you’re going to think is cheap all the way down,” said Chanos.

The question is whether Chanos' short thesis is now playing out for Gamestop.

The major problem for Gamestop is the roll-out of fiber and 4G networks. Everyone with an iPhone wants faster data speeds and this is the dominant driver in telecom.

However, the faster data speeds could be a death sentence for Gamestop (NYSE:GME). First of all, if consumers have better download speeds they will play more games online via their PCs, tablets or smart phones. Secondly, faster download speeds mean that consumers can download large video game files in minutes.

If a teenager can download World of Warcraft in five minutes, will he go to the mall to buy a hard copy from Gamestop or Best Buy (NYSE:BBY)?

Investors watched digital music destroy record companies. Investors have watched Amazon (NASDAQ:AMZN) steam roll Barnes and Noble as books have become largely eBooks. Investors have watched the movie industry struggle as Netflix (NFLX) put Blockbuster into bankruptcy protection.

Could the video game industry be on the edge of the same type of disruption?

Rating: 3.3/5 (13 votes)


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