GME is Facing Resistance

August 30, 2013, 11:58 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The leading video-game retailer GameStop Corp (NYSE:GME ) moved higher after announcing better-than-expected results, and forecasting that comparable-store sales will rise by at least 11%. The forecast surprised investors after posting nine consecutive quarters of negative comps. The highly anticipated refreshes of the PS4 and Xbox One could be the largest in the history of the industry. However, after a double YTD in GameStop’s stock, could there more upside or you should investors take profits?

The video game retailer expects to benefit from Sony Corporation’s (NYSE:SNE) PlayStation, and Microsoft Corporation’s (NASDAQ:MSFT) new Xbox One, both expected to hit shelves around mid November. The previous version of Xbox released in 2005 helped GameStop shares more than double. The company appears to be in an even better position this time around, as its share of the video game market has grown from 15% to about 25%. The number of stores worldwide has grown by nearly 50% since the debut of the last Xbox, with more than 2,100 new locations opened, now totaling over 6,500 retail locations. The company did not release pre-order numbers, but did reveal that 1.5M people are on the “first to know” list for the PS4, while 700,000 are for the Xbox One.

The upcoming software releases could provide upside for the stock as well. Next month Take-Two Interactive Software, Inc. (NASDAQ:TTWO) launches the widely popular Grand Theft Auto V, which always creates a buzz among gamers. The younger gamers will be lined up for Disney's Infinity release that rivals the Skylanders franchise, which is a $1.5 Billion market for Activision Blizzard. However, the biggest of all could be the releases of Activision’s Call of Duty game and its competition from Electronic Arts, Battlefield 4.

GameStop’s loyalty rewards program, which now has about 25 million members, aided in blocking software manufacturers from switching to download-only sales or any other changes that might limit the massive secondhand market for games. Customers are much more likely to buy a new game at full price if they know they can resell it in the future and get some of their money back.

For GME, The stock briefly broke above long-term resistance, but failed to remain above that level, and instead reversed back into its channel; once it did sell signals surfaced.   

Hardware pre-orders look very strong and upcoming software releases are already creating a huge buzz among gamers, the company forecasted comparable sales bouncing higher by at least 11%, and with so many product events in the near term that seems positive for the company, but the stock and the company are different.  Because the stock tested resistance and failed to follow through there are red flags in the face of this otherwise positive product cycle.

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