Wednesday, September 26, 2012

GT Advanced Tech (NASDAQ:GTAT) : Sapphire cover glass opportunity not there; Sell - Canaccord

Canaccord's Jonathan Dorsheimer downgrades GT Advanced Tech (NASDAQ:GTAT) this morning to Hold from Buy while lowering their price target to $6 (prev. $9).

- According to him, Asian meeting don't support the cover glass opportunity touted by management and Wall Street.

Despite the recent optimism and announcements, after speaking with many companies within the sapphire supply chain Dorsheimer concludes that the sapphire cover glass opportunity is not a near-term possibility using GTAT’s ASF method.

He agrees that sapphire covers can come at a premium, but the $10 to $20 price point that GT talks about are possibly consistent for aftermarket but remain 2-4x the target levels for adoption of an iPhone. Dorsheimer also agrees that by increasing charge size, changing things within the sapphire recipe like cycle time, perhaps quality, too, can reduce the cost of the crystal growth. However, the biggest roadblock that we have encountered from GT’s customers, its competitors and other equipment vendors is not necessarily the crystal growth, but the post processing.

Supplier consensus is so far that sapphire windows machined and polished from bulk sapphire boules range from the $25 to $40 for a 4” window – most of it coming from processing – well above the required range.

Asthey have previously indicated, this is an opportunity about which handset makers are seriously inquiring. However, Canaccord's meetings suggest this is Apple-driven and Samsung is heading towards more of a plastic-based OLED approach.

Canaccord says they learned that Apple has been investigating this opportunity since 2006, and Apple has signed NDA’s with many sapphire companies since. So far nobody has been able to resolve the cost/performance issues. They believe that the “signed agreements” GT has spoken about are of this nature and not purchase orders.

They continue to believe that the existence of active mobile sapphire opportunities (camera lens, SOS) and rumors of cover glass de-risks the company’s existing backlog, but they do not see any new large NT orders given what they conclude is a limited commercial opportunity.

Notablecalls: This is a significant call as Canaccord was first to upgrade GTAT on August 17, a day after management touted the sapphire cover glass oppy at Canaccords' growth conference. Other analysts followed and as you can see from the increased trading volume the comments didn't fall on deaf ears.

Now it appears lots of fast money types are buried in the name after the co so conveniently issued a convert and now Canaccord comes in saying all this sapphire hype was for..pretty much nothing. No Apple deals on the horizon, not by a long-shot.

Goldman murdered Veeco (NASDAQ:VECO) with their downgrade two days ago saying LED capital equipment market isn't going to recover much in '13-'14. Ugh.

I think this downgrade will take GTAT closer to $5/share level today. Below $5 in a week?

Sandisk Corp (NASDAQ:SNDK): Time to sell - JMP

JMP Securities is making a somewhat out-of-consensus call this morning downgrading Sandisk Corp (NASDAQ:SNDK) to Market Perform from Outperform.

- Alex Gauna has been OP-rated in SNDK since 2009 when the stock was below $15.

JMP says they see near-term trading resistance ahead of 3Q12 results due to a combination of elevated expectations, recent sluggishness in NAND flash pricing improvements, computing and electronics market weakness, and iPhone 5 supply constraints.

Shares of SNDK have risen ~45% from early June lows (SOX +10%) on improving NAND pricing trends and the correct anticipation of its inclusion in the new iPhone 5. Firm believes these favorable developments are now fully reflected in the stock. Although fundamentals are now moving in the right direction for SanDisk and the NAND flash industry as a whole, weakness in computing trends and supply constraints are leading JMP to trim their previously more optimistic 2012 non-GAAP EPS estimate from $2.10 to $2.00 (Street $1.78). They are also revising down their FY13 non-GAAP EPS estimate from $4.00 to $3.50 (Street $3.07) to reflect lower intermediate-term gross margins that may stem from weaker end markets, Samsung looking to fill excess capacity, and Apple (MP) is coming to represent a greater percentage of sales. They view current SNDK trading levels of 13x PE/ FY13 as appropriate relative to our coverage universe average in the low- to mid-teens.

JMP sees near-term trading resistance ahead of 3Q12 results due to a combination of elevated expectations, recent slowing in NAND pricing improvements, computing end market weakness, and iPhone 5 supply constraints. Although inclusion in the iPhone 5 puts SanDisk in a good position to meet JMP's 3Q12 revenue growth assumption of +21% q/q (Street +17% q/q), they believe this is in the stock and that any wrinkle could weigh heavily on valuation as recently occurred when iPhone component peer Skyworks (MO, $40 PT, PE based) positively pre-announced, but not by enough.

It is likely premature to get overly upbeat on more rational NAND industry supply additions based on Toshiba's mid-summer announcement of a 30% production cut and a recent report out of Korea speculating that Samsung may reduce capital expenditures by up to 50% in 2013. In JPM's view, there is as much to worry over as cheer from the Toshiba moves represent a magnitude of downward adjustment not seen since the great recession. Also, whatever capex decisions Samsung ultimately makes for 2013, it will first have to absorb an almost 50% increase in capex (>$13B) slated for 2012, in the face of losing the iPhone 5 as a demand driver.

Reducing 2013 gross margin assumptions due to the following: 1) to account for recent weakness in computing market trends and our diminished view of Windows 8 and Ultrabooks as near- to intermediate-term SSD demand catalysts; 2) to bake in the potential of Samsung pricing pressures as it absorbs excess capacity; and 3) to reflect their expectation that Apple sales will drive lower than average gross margins due to the inclusion of its own custom NAND controller architecture.,

Notablecalls:
I love it when an analyst changes his/her long-held view, especially when he/she has been so right as Gauna has been in SNDK.

He may be right this time around as well. Avian Securities pinged me with the following Friday afternoon:

SNDK feels heavy again today and I want point out our SNDK commentary from us yesterday.... The stock has had a great run as some competitors have discussed “improving fundamentals”.  Other than stable pricing I’m not sure what they are seeing as improving other than more talk from producers saying they’ll cut CapEx (heard that before).  This is the busiest time of year and there is plenty of supply.  I think it’s time to be looking on the sell side of the name...might be a little early but upper end here and here is yesterdays comments.

9/20 NAND - SNDK, Toshiba, Samsung - We are not nearly as excited at NAND as street is right now. Yes iPhone 5 build and other tablet/phone builds have taken up some supply but without any significant dislocation. SSD demand is not where it needs to be this time of year. SD cards / USB drive sales are still awful. While smartphone builds are good, device loading isn’t growing. This should be seasonally strongest time for NAND consumption and at best we have seen flat pricing after a 6 month freefall. Also Chinese New Year upcoming and our contacts point out that this year only represents 4 days for build vs. 7 days last year. Memory users have front loaded purchases. We acknowledge commentary from memory makers around “restraint” regarding capacity additions but we see little in a positive catalysts now until next summer. Pricing is stable right now but dealer and broker feedback points to plenty of availability and short lead times as evidence of surplus supply. We’d be wary of any rally here.

Avian knows the space well and has made some terrific out-of-consensus calls in the past. So now you know what the smart money is thinking.

I expect SNDK to get hit today and in the n-t as these cautious views spread. Gauna plays the SWKS card so well- the stock got hit -25% merely because they didn't produce blow-out numbers. Could easily happen to SNDK.     

Below $42/share today? Below $40 in a week?

Friday, September 21, 2012

Doesn’t Taste Like Chicken: Upgrading US Containerboard Stocks - Deutsche

Deutsche's Paper & Packaging is eating a bit of crow this morning. They are increasing their probability of success estimate on the current containerboard hike from 50% to 75-80%.

They are upgrading the c'board names, again:

- International Paper (NYSE:IP), Rock-Tenn (NYSE:RKT), Packaging Corp. (NYSE:PKG) and KapStone (NYSE:KS) are all upgraded to Buy from Hold.

According to the firm, two factors have driven their change in view. First, was the Tuesday release of the August industry figures. It is hard to remain neutral in the face of a 115K/ton m/m drop in inventories to the lowest August level in decades & a 97.5% operating rate. Second, subsequent conversations with privately-held players across the trade convinced them that they have been too cautious. As a long-time acquaintance at a private integrated noted on Wednesday evening: 'it is veryunusual, . but we have no incremental tons available for the market.'

Firm says they don't like moving stock calls around rapidly, but they like being wrong even less. If the situation changes and you find yourself on the wrong side of an argument, it’s best to own-up and move forward. With some significant price gains almost certain to be posted in the trade papers this weekend, they are adjusting their ratings.

What will Pulp & Paper Week show for September price levels? This exercise is always a bit like dealing with the “Wizard of Oz” and has the feel of circular logic (let's see - 'you don't move until he moves, but he can't move until you do?’). However, based on additional discussions, DBAB's best “guess-timate” is that PPW will report an increase in the $40/ton range. Based on their channel checks, it would be hard to argue that all $50 is in place. If PPW moves $40/ton this month, the industry is apt to get the balance of the next month.

Off to the races?
While Deutsche team thinks containerboard stocks will trade up in reaction to a strong PPW “print” this weekend, it’s important to make a few points. First, there is no real shortage of bullish sentiment among analysts & investors and current share prices reflect a portion of that sentiment. Second, investors should remain realistic about what a more consolidated & better-managed containerboard sector might deliver financially. They have heard a few arguments about price & margin potential that strike as outlandish & silly. They think there is room for EBITDA margins & returns to improve – but within limits. A “best case” scenario for this industry would be improving margins to reasonable return levels and then focusing on greater stability across the cycle. The food & beverage can industry offers an interesting model. Pushing price too hard in the short-term will damage long-term value. There are always alternatives in packaging. The higher corrugated box prices rise, the greater the customer’s incentive to look at options like returnable plastic containers and shrink wrap. Moreover, higher containerboard prices increase the incentive for upstart players to add supply.

They haven't changed their #'s yet but here's the EPS sensitivity for a $50/ton price hike:
        
                   
             
Notablecalls: Here's the Sept 10 call from DBAB that set it all in motion. It was followed by a downgrade from Longbow a week later that did most of the damage. Longbow is known for their quality checks.

I saw several firms defend the c'board stocks both publicly and in private so it has been a real battle. And now DBAB blinked, just ahead of late-Friday's data release.

As you can see from the above table a lot is at stake and emotions are running high.

I expect a squeeze in the space today. I'm somewhat at a loss as to how high people will bid these names but +4-5% could be the level.

If it doesn't taste, act or look like chicken but Chuck Norris says it's chicken, it's f*cking chicken.

Tuesday, September 18, 2012

Lamar Advertising (NASDAQ:LAMR): Worth $60/share as a REIT - Goldman Sachs

Goldman Sachs is upgrading Lamar Advertising (NASDAQ:LAMR) to Conviction Buy List from Neutral saying significant upside in store after REIT conversion.

- LAMR worth $60/share at median REIT stock multiple, Goldman says.

Source of opportunity

Goldman upgrades Lamar to Conviction Buy from Neutral, with 29% upside to their new $42 target price. LAMR expects to receive an IRS ruling on its REIT election in 1Q13 and they see a high probability of approval given a recent IRS ruling that established a billboard REIT precedent. While the REIT conversion is not a certainty (due to digital displays), they find the risk-reward compelling with at least 29% upside if election is completed vs. 15% downside if it falls through. Previous REIT conversions have outperformed and may serve as a template for LAMR. AMT/EQIX are up 75%/90% versus the S&P 500 up 30%/16%, since REIT conversion talk began.

Lamar is currently trading at 11X Goldman's 2013E AFFO estimate ($2.99 per share), which is a 45% discount to the REIT sector median and a 21% discount to the median for the bottom quintile of REIT stocks. Firm's revised $42 12-month target price is based on 14X 2013E AFFO, the median for the bottom quintile of REIT stocks. If Lamar traded at the median REIT stock multiple of 20X, then it would imply a value of $60.

If Lamar does receive REIT conversion in 1Q13, what should investors expect out of the stock?
Broadly, Goldman expects the stock to perform better than peers as valuation moves to a REIT framework supported by higher trading multiples. However, given the 20% plus move in the stock since mid July and the deterioration in underlying outdoor advertising demand (same board digital revenue flat in 2Q), they believe the near-term price appreciation may be less muted until the IRS responds.
     
                                
 
Since American Tower (AMT) announced its intention to convert to a REIT in May 2010, the stock is up over 70% compared with the S&P up 30%. Slightly less than half of that appreciation occurred within the one year period between AMT’s initial discussion of REIT conversion to the favorable IRS private letter ruling in May 2011. From the time that AMT’s board of directors approved the REIT conversion in late May 2011, the stock is up 34% compared with the market up 6%. While LAMR shares are up more than 20% since July, due to REIT conversion speculation, the AMT exhibit suggests that LAMR shares could significantly outpace the market over the next year.

Notablecalls:
REIT conversion - the pair of words that gets people excited these days as evidenced by LAMR's 15% jump on August 8 when the company first officially commented on the topic.

The moves produced by EQIX, AMT and WY following REIT conversion news have investors salivating for more. Now we have Goldman saying it's very likely Lamar (LAMR) can and will convert into a REIT, potentially doubling its current valuation.

I suspect investors will not wait for next year to catch the upside. They will move in to buy the stock now. The upside is that big - possibly as high as 100%.

Provided it already traded as high as $35-36/share on the REIT news a month ago, I expect the stock to produce a sizable move on this Goldman blessing.

Thinking back toward $35 today.
Use possible pull backs to scale in.

Definitely one to consider as a longer-term hold as well.

Monday, September 17, 2012

Gambardella @ Metals: The squeeze is over. Sell.

J.P. Morgan's metals whiz Michael Gambardella is downgrading the North American Metals & Mining space this morning:

Among the most interesting names:

- Cliffs Natural (NYSE:CLF) to Neutral from Overweight with $36 price target (prev. $55)
- U.S. Steel (NYSE:X) to Neutral from Overweight with $29 price target (prev. $43)

- Others downgraded include AKS, RS and MUSE.

Since Friday September 7, the steel stocks (including CLF) are up roughly 13% compared to a 2% gain in the S&P 500. Gambardella thinks this jump is largely from the announcement of China's infrastructure spend and QE3 which likely pressured the extremely negative consensus view held by most investors on the group. However, he views the recent move up in the stocks largely as short covering, notably the recent appreciation of CLF after short interest as a percent of float reached levels last seen in late 2007. He does not think the fundamentals are supportive of a continued move higher beyond this recent short covering and expects steel prices to decline soon.

Steel prices likely to decline further
After their run up from the high $500/ton range several months ago to recent highs of around $670-680/ton, JPM expects hot-rolled sheet steel prices in the U.S. to decline further from current levels of roughly $645/ton despite relatively positive supply/demand fundamentals. In their view, scrap prices appear to be overvalued (especially to iron ore) and set to drop, which should cause scrap-based minimills such as NUE and STLD to drop their flat-rolled prices. They also believe that some of the recent run up in steel prices could be partially due to increased buying as a precaution ahead of the possibility of a strike at X and/or MT as they renegotiated their labor contracts. However, both X and MT have reached tentative agreements, and they think buyers are likely to move to the sidelines over the next month. The election season is also likely to weigh on demand, as consumers of steel are likely to be cautious until the election is over and there is some resolution on whether the "fiscal cliff" will be averted. Most importantly, JPM also believes that raw material prices (iron ore, met coal and scrap) will not be supportive of higher global steel prices given their recent declines and their forecasts for not much of a rebound.

Demand is near pre-crisis levels. Gambo doesn't believe that demand is a significant contributor to still weak (compared to pre-crisis levels) steel earnings. Total steel apparent consumption (both flat and long products) YTD July 2012 is at 93% of comparable 2008 level. Flat-rolled apparent consumption YTD in 2012 is at 94% of comparable 2008 levels. On the supply side, he does recognize that a significant reduction on North American capacity could potentially benefit the industry, but don’t foresee any significant cuts in the near-term beyond the June bankruptcy of RG and shutdown of its assets.

Downgrading AKS, CLF, MUSA, RS and X to N from OW.
JPM thinks AKS, CLF and X's fixed cost advantages will be muted in a lower priced steel and raw material cost environment while MUSA and RS’ earnings should be squeezed by lower steel prices and are trading at or near their 52 week highs.

Notablecalls: Gambardella is the Axe in the space and his decision to back off from his positive stance will hurt the space today and in the coming days.

- Cliffs Natural (NYSE:CLF) has been the poster boy of the recent squeeze, with the stock up almost 50% in mere 10 days. I have counted at least 5 firms trying to chop it down with downgrades and their clients sure have the tire marks on their backs to prove it.

Now Gambo comes in and says it's all been a big squeeze. Nothing fundamental. It's not getting any better from here. That's the beauty of the call. That's why Gambo is the Axe.

- U.S. Steel (NYSE:X) will also work. I see CRT also cutting smaller peer AKS after their recent well-timed upgrade as steel price headwinds worsen (AKS warned on Friday). That will add fuel to the fire.

I see X, CLF down 6-8% today. The squeeze is over. Use any bounces to scale in (I hope there will be some!)

Tuesday, September 11, 2012

Notable Calls on Twitter @ thenotablecalls


Today was a perfect example why one should use both the Notable Calls blog and twitter:

- This morning Think Equity analyst Yun Kim made a seemingly big call on TIBCO Software (NASDAQ:TIBX) saying their checks uncovered significant internal issues that led the firm downgrade their rating on the co. I speculated the call would cause a 7-10% decline in the stock and lo and behold I was right.

- Yet, after being down -10% on the day the stock started a slowish recovery until about 12:20 AM ET a fellow trader on Notable Calls Network (NCN) pinged me with the following:

'12:20 ..hearing UBS saying Think Equity is wrong on TIBX.....would be aggressive buyers now !!!'


Shortly after blasting the call to other NCN members I tweeted the call on twitter. As you can see the stock proceeded with a 2 pts+ recovery after Merrill Lynch/Bofa defended the name a while later and the co itself put out a 8-K denying any job cuts.

                          

Beautiful action any way you slice it.

Join us on twitter @ thenotablecalls

Actionable Call Alert: Tibco Software (NASDAQ:TIBX)

It's been a while but Think Equity's Yun Kim is out with a potentially devastating call on TIBCO Software (NASDAQ:TIBX) downgrading the name to Hold from Buy with $32 price target (prev. $36) after their checks revealed lingering organizational issues.

- 10% headcount reduction planned in U.S.

Kim notes additional checks since early last week suggest that there could be some organizational issues lingering in the Americas region, which may result in a reduction in the workforce for the region. They believe it could be a sizable number (maybe up to 10% of the region's headcount) across all functional groups. Firm notes that there were 1,561 employees in the Americas region at the end of FY11. Kim believes some of the reduction is associated with the company's efforts to streamline its operation given the numerous acquisitions it has made over the past several years. However, they also believe that some of the reduction is reflective of lingering organizational and sales execution issues in the Americas region and could signal more modest growth in the region going forward, at least in the near-term.

Kim notes that the company's head of the Americas region left after the end of F2Q due to performance issues. Given that shares are trading at a premium to its peers, the firm expects shares to be under pressure if the company implements a sizable headcount reduction plan, which they believe many investors will interpret as a sign that the company's business trends are turning negative.

They are reducing their license and total revenue estimates going forward, but are maintaining their F3Q top-line estimates given their positive checks, especially in its European region. Think Equity is also raising their margins and EPS estimates to reflect possible headcount reduction and tighter cost controls going forward.

Notablecalls: Actionable Call Alert!

Here's why:

- On July 5, another big-data player Informatica (NASDAQ:INFA) issued a warning blaming mostly internal (sales) execution issues. This resulted in over 30% haircut to share price:


Here's the release:
http://www.informatica.com/us/company/news-and-events-calendar/press-releases/07052012-preliminary-q2-results.aspx

- Tibco trades around 25x EPS which means execution needs to be flawless. If Kim's right, Tibco shareholders are in for some big time volatility.

I'm guessing 7-10% downside in the n-t for TIBX putting $29-30/share levels in play.
Use possible bounces to scale in.

Monday, September 10, 2012

Actionable Call Alert: Containerboard (NYSE:IP, PKG, RKT, KS)

Deutsche Bank's Paper & Forest Products team is making a significant call this morning downgrading their Containerboard space after their checks revealed the widely anticipated autumn price hike may note materialize:

- International Paper (NYSE:IP) to Hold from Buy with $39 price target (prev. $41)
- Packaging Corp. of America (NYSE:PKG) to Hold from Buy with $34 price target (prev. unch)
- Rock-Tenn (NYSE:RKT) to Hold from Buy with $75 price target (prev. $80)
- Kapstone (NYSE:KS) to Hold from Buy with $23 price target (prev. $24)

Over the last 7-8 weeks, the stocks have rallied sharply (up 30-40% in some cases) in anticipation of an autumn price hike. While the market seems to be assuming the hike is a "done deal", the firm notes they are not convinced. They think real questions remain about whether producers can implement & then maintain the increase. If anything, they've become a bit more cautious. Thus, in firm's view, the prudent move is to take a step back from their Buy recommendations.

Since the price hike announcements began to emerge in mid-July, the backdrop for the initiative has gotten murkier

Last week's sub-50 reading on the ISM manufacturing index is a cautionary sign for future containerboard & box demand. At the industry level, the continuing downward drift in old corrugated container (OCC) signals lackluster demand and reduced costs for producers of recycled containerboard. Finally, reports of quiet downtime by at least one major producer raise the question of just "how tight?" the market really is at the moment. While the firm had initially viewed the prospects of a successful hike at 60-70%, they now view the odds at only 50%. A 50/50 handicapping of the price hike is hardly bearish. However, given the optimistic expectations priced into the stocks, it's hard to argue that these stocks need to be our "conviction list".

Unfortunately, they think the Street has placed too much emphasis on this hike attempt as a litmus test of a newly consolidated & restructured industry
As a result, if the price hike fails, the short-term negative reaction in the stocks could prove dramatic. We think the emphasis on & interpretation of the hike is being overdone. While consolidation & more disciplined management should help investment returns over time, they aren't enough to over-ride economic fundamentals. Raising prices in the face of a global economic slowdown, flattish domestic demand and falling costs is a tall order for any industry.

Containerboard price forecasts remain unchanged
As they have not assumed any benefit from the hike in their 2012 estimates, Deutsches's current EPS forecasts remain unchanged. They will continue to monitor supply/demand fundamentals as well as pricing behavior in the market.


Notablecalls: Actionable Call Alert. Most of these names will be down 7-10% on this. Here's why:

- It was DBAB's team that made the initial positive call in the space back on July 10:

A few months back, we didn’t expect to be talking about an autumn price initiative. But, . . . here we go. Over the next several days, DB believes we could hear about containerboard price hike announcements in the $40-60/ton range.
Now let's look at the charts:



- CSFB upgraded the space on August 13 driving the names even higher over the next weeks. The reason for the upgrade? You guessed it. Expected containterboard price hikes!

With DBAB team now coming out saying they are not so sure the price hikes will stick, some of that money put to work in the space will need to reverse. Millions of shares will need to be unloaded. This will take weeks.

Mark Wilde and Debbie Jones from DBAB's Paper & Forest Products team have done wonderful work in the space. Give kudos when it's due. I do!

Tuesday, September 04, 2012

Gamestop (NYSE:GME): Tactical opportunity as title and hardware drought breaks; up to Buy - Goldman Sachs

Goldman Sachs is upgrading Gamestop (NYSE:GME) to Buy from Hold with a 12-month price target of $25 (prev. $20) on a combination of higher operating assumptions from new software and hardware as well as assuming share repurchases supplement dividends to the point of reaching 90% of FCF returned.

- Goldman's estimates stand about 14% above consensus.

They see outperformance of GME shares for three reasons:

1) 2012’s ytd declines have been largely driven by supply rather than demand, and supply will improve in 2H12. As stronger releases hit shelves in 2H12, Goldman expects industry declines to slow, improving sentiment around GME shares.

2) Consensus estimates are not fully factoring in the launch of the Wii U and its impact on 2013 revenue. Even if the Wii U underperforms the original Nintendo Wii by 50%, it will contribute 13 points of growth to software sales. Given the strong lineup of already announced titles for 1H13 and the soft comp from 1H12, the firm expects EPS of $3.82 for GME – 14% above consensus.

3) GME’s cash dividends and share buybacks provide an attractive cash return to shareholders, and build in support for the shares. Given the ~19% FCF yield and ~5.5% dividend yield, they see downside risk somewhat tempered in the near term. GME has returned 114% of FCF over the 12 months ending in April, and the firm doesen't think consensus reflects the consistency of its share repurchases. Its dividend yield is the highest in Goldman's Hardlines coverage, with Staples the closest at 4%, while on a rent-adjusted EV/EBITDAR basis GME trades at 3.9x 2013E vs BestBuy at 4.7x, and office retailers at an average of 5.7x.

While they share investor concerns about the long-term state of physical retail for games in an increasingly digital environment, and reflect this in their 6.5x target EPS multiple, Goldman believes for core console based games disruption of the retail based model is unlikely for the next 2 years given 1) limited hard drive space on consoles today, 2) mass adoption of the next generation of Microsoft or Sony consoles not until 2-3 years after a 2013 launch, or 2015-16, and 3) consumer preference for the salvage value of used games.


* And now for the most interesting part of the call: History of GME shares around console launches

GameStop shares have historically appreciated drastically following the launch of a new console cycle, even when market sentiment leading up to the launch is very negative.

Investor behavior appears similar to the last console cycle.
Leading up to the launch of Microsoft’s Xbox 360 (which ushered in the current console cycle), there was a great deal of negative sentiment surrounding GME shares, as is evidenced by the spike to nearly 50% short interest in October of 2005 – mere weeks before the console’s launch. At that time, there was concern that the new consoles would see poor adoption rates, and that due to the console’s improved internet connectivity, digital distribution might cut GME out of the channel. Short interest went on to plummet for the next year while GME share prices appreciated over 50% in the same period. In the two years following the launch of the current generation’s first console, GME share prices more than tripled.


While Goldman acknowledges that the competitive landscape for gaming has changed since 2005, they still believe that the concerns about adoption rates and digital distribution are overdone, at least for the next two years given 1) no new disruptive console from Microsoft or Sony until late 2013 at the earliest, and 2) a further 2-4 year lag beyond that
for mass adoption.

Notablecalls: Goldman has been Neutral-rated in GME since 2009 and looks like they are calling for another big upside move in the name similar to what we saw in '05-'06. This should generate ample amount of interest, especially given the 40% short interest.

Investors consider the business model broken but Goldman says it ain't so. Digital distribution will be just another part of GME's business.

Also, we may have a big catalyst in the form of Nintendo's Sept 13th press event where they are expected to announce Wii U along with the launch date. We are now in the 8th year of the current console cycle and the Wii U will represent the start of a new one, which is a positive for GME.

The stars may finally be aligning for them.

I'm guessing the stock will be trading closer to $20/sh level today and possibly higher in the coming weeks. All-in-all this is more of a solid L-T call.