PreMarket Prep Stock Of The Day: GameStop

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.

On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.

Some of the dogs in the market have been barking this week — especially ones with high short-interest, and none are louder than GameStop Corp. GME. It's Friday's PreMarket Prep Stock of he Day.

GameStop's Endless Descent: GameStop peaked in January 2013 at $57.74 and has yielded a negative return of 78% since then based on its current price.  

Over that same time period, the S&P 500 index has yielded 129%, making for horrible relative performance.

Multiple dynamics have contributed to the decline, but one primary reason one has been the overall decline in pre-owned games. 

With the emergence of online video gaming companies such as Activision Blizzard, Inc. ATVI, Electronic Arts Inc. EA and Take-Two Interactive Software, Inc. TTWO, gamers have opted for new titles as opposed to playing old ones.

GameStop Finally Finds A Bottom: Although the issue bottomed in August 2019 ($3.15) and rallied to end the year at $6.08, it slumped in January to end the month at $3.84. 

The issue was not spared in the market meltdown and did not find its ultimate low until April 3 ($2.57), a few weeks after the market bottomed out.

The move off that low was tepid until April 13 and 14, when GameStop made a two-day move from $3.89 to $5.95 on heavier-than-average volume. 

The catalyst: Scion Asset Management reported an additional stock purchase in a Securities and Exchange Commission filing. 

The investment firm — founded and run by Michael Burry, who gained notoriety by predicting the financial crisis in 2008-2009 — bumped its stake to 5.3%. 

Cohen Adds Fuel To The Fire: After the close Sept. 21, Chewy CHWY founder Ryan Cohen raised his stake in GameStop to 9.98% 

In doing so, he announced his plans for the company to compete with Amazon.com Inc. AMZN. 

On Tuesday, Sept. 22, the issue rallied from $8.75 to $10.56 on monster volume. 

In addition to the reaction of the activist stakes, the huge short interest in GameStop has increased the volatility in the issue. 

Many short sellers have left GameStop for dead by shorting the issue and banking on it going to zero. 

GameStop's New Catalyst: On Thursday, as the issue was trading at $9.22, it was halted with news pending at 2 p.m. And it was big news. 

The company announced a multiyear strategic agreement with Microsoft Corporation MSFT to standardize its business operations on Microsoft cloud solutions.

As expected, the issue ripped higher off the halt, reopening at $10.37 and reaching $11.37 within minutes. 

It continued higher, reaching $13.64 before retreating to close at $13.49.

In Friday’s session, GameStop opened lower and continued down, reaching $12.06 before sharply reversing course.

The issue reached the $14 level before reversing again, and the stock was losing 10.88% to $12.04 ahead of the close Friday. 

GameStop Analyst’s Take: Wedbush Securities analyst Michael Pachter, a long-term follower of the issue, shared his perspective on the recent news with Benzinga.

The analyst thinks the issue moved on this statement: “GameStop and Microsoft will both benefit from the customer acquisition and lifetime revenue value of each gamer brought into the Xbox ecosystem.”

Some may read that to mean Microsoft will pay GameStop a royalty in perpetuity on any business generated by the purchaser of an Xbox, he said. 

"I think it’s more likely this refers to a revenue share of 10% or so [Wedbush's estimate] on payments made under subscription agreements that are initiated in a GameStop store," Pachter said.

"If a customer signs up for the $15 monthly Microsoft Game Pass at a GameStop store, we would expect GameStop to share in that revenue for as long as the customer continues to subscribe."

If the customer instead signs up for Xbox All Access at $35 a month, GameStop would then receive $3.50 per month for two years, the analyst said. 

"It isn’t clear that there is any type of 'perpetual' arrangement, and the market reaction to this may have been overdone."

Pachter said he does not expect more than a million or so of these subscriptions to be sold by GameStop in the next two years

"So we’re talking about $3.5 million [per] month in revenue times 24 — around $84 million lifetime — replacing approximately $40 million that they would have earned upfront if they sold 1 million Xboxes.”