Wedbush: GameStop Has Near $10 Upside As Next-Gen Strength Continues

• Shares of GameStop Corp. GME have gained 25.6 percent, year to date.
• Wedbush’s Michael Pachter maintained an Outperform rating on GameStop, while raising the price target from $52 to $55.
• The company reported its Q2 results above expectations, while raising the full year guidance. GameStop continues to gain share of the next gen market.

Given GameStop’s strength in the next-gen market, Pachter believes that the company would be able to beat its conservative guidance for Q3 and FY2015. The next-gen market share helped drive strong results for Q2, as did the company’s strength in pre-owned and collectibles, and mobile growth.

Sales for Q2 were higher than the estimates and the consensus, with same store sales growth above expectations. New hardware and software sales also increased significantly higher than expected. The Non-GAAP EPS for the quarter was well ahead of the estimates, consensus and guidance.

According to the Wedbush report there has been an improvement in software trends in 2015, with July software sales up about 2 percent as compared to 2014. This positive growth is expected to continue in 2H15. In addition, with a strong lineup of releases slated for 2H, there is potential for upside.

The management announced the initial Q3 guidance below expectations, attributing the conservative guidance to an expected decline in new software sales, with the August release slate appearing lighter than that seen in 2014.

“Taken as a whole, we viewed the comments as somewhat bearish on management’s part, and believe that some investors expected a more bullish approach to Q3 guidance,” Pachter said.

The full year guidance was also conservative, which Pachter believes was due to 75 percent of GameStop’s EPS coming in the second half of 2015.