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Why It May Not Be Game-Over for GameStop

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Though downloads are big competition, a great trading opportunity may be coming.

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GameStop (GME), the world's leading video-game retailer, lowered guidance this morning due to delays of some key titles and the crappy economy. The stock's getting creamed, but is it time to jump in ahead of a big holiday season?

Long-term, GameStop's outlook is far from sunny.

The company is facing secular decline due to download-based game sales. Electronic Arts (ERTS) made some waves in July with strong sales of its downloadable Battlefield 1943 title. Sony (SNE) and Microsoft (MSFT) have toyed with selling full games via download, with the latter recently launching its Xbox Live Games on Demand service.

Game downloads tend to focus on casual, classic, and online-only titles; the major online services just don't have the infrastructure to support a digital launch of a new blockbuster game. GameStop will still have crowds lined up at midnight for the hot titles -- like Activision's (ATVI) Call of Duty: Modern Warfare 2 -- and it will do big numbers with these types of games.

But the emergence of downloads is a major sentiment problem that limits multiple expansion, even in the case of improved earnings trends going forward. The fact that GameStop hired a Head of Digital Media shows that the company is now on defense against downloads.

However, a great trading opportunity may still soon come with GameStop.

September will be a blockbuster month for the industry with the release of Halo 3: ODST and The Beatles: Rock Band. These are guaranteed multi-million unit sellers that will garner mainstream media attention. Modern Warfare 2, coming in November, will be the second-biggest entertainment release of the year behind Transformers 2. The recent PlayStation 3 price-cut should also have a positive impact on hardware sales.

These catalysts could bring in courageous dip buyers. I'm looking at a buy point of $22 or so before chasing the pennies in front of the steamroller.

Just a quick housekeeping note: I sold Activision after its recent earnings report. Unless the stock bounced to $14 or so, booking the tax loss made more sense than holding it. I'll be buying it back once I'm around the wash-sale requirements. I'm still holding Take-Two Interactive (TTWO) and THQ Inc. (THQI).
Positions in TTWO, THQI.
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