Wedbush's Michael Pachter Highlights Long GameStop, Short Best Buy Pair Trade
There are a number of catalysts over the next year that are likely to drive GameStop Corp. (NYSE: GME) shares higher and shares of Best Buy Co Inc (NYSE: BBY) lower, Wedbush's Michael Pachter said in a report. He recommended a pair trade of GameStop shares long and Best Buy shares short, citing upside to the former’s guidance and the latter being impacted by an iPhone letdown.
Upside For GameStop
Analyst Michael Pachter said that GameStop’s EPS guidance seemed “easily achievable,” in view of the ongoing strength of the next-gen console cycle, the launch of new consoles from Microsoft Corporation (NASDAQ: MSFT), Sony Corp (ADR) (NYSE: SNE) and Nintendo, a likely successful launch of virtual reality from Sony, and disciplined capital management.
“We believe that the bears have vastly underestimated the financial impact of each of these items, and have overstated the threat from higher digital full game downloads to an increasingly diversified product portfolio highlighted by the emergence of Technology Brands,” Pachter wrote.
Downside For Best Buy
Best Buy has guided to a comp turnaround in 2H16. The analyst said, however, that the company is unlikely to achieve this. He added that there was no reason for Best Buy to be confident of gaining share in a competitive and declining consumer electronics market over the next several years, which actually suggests “negative comps and declining earnings for years to come.”
Moreover, the iPhone 7 launch later this year is likely to be “underwhelming,” Pachter commented, while adding that this would result in a downward revision to Best Buy’s FY17 guidance.
“We believe that our thesis will play out between October (PlayStation VR) and January (holiday comps), setting up a favorable pair trade over the next few months,” the Wedbush report added.
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