Unusual Options Activity In GameStop
Gamestop, the gaming retailer has been struggling with shrinking profits as consumers shift to downloadable videogames instead of buying physical versions from stores. Microsoft plans to offer digital downloads at significant discount over the physical version. Sony introduced PlayStation Now, an on-demand game-streaming service that promises to deliver old PlayStation games over the Internet. GameStop also faces a major threat from the rising advent of game streaming, with technology giants like Alphabet Inc's Google, Microsoft and others getting into the still nascent space.
Back in the middle of 2019, Michael Burry, the famed "Big Short" investor who profited handsomely from the subprime-mortgage crisis of 2008 decided to play a different game and when long GameStop by buying 3 million shares through his investment firm, Scion Asset Management. His thesis was Sony and Microsoft were both putting disc drives in their next generation game console.
NOTE: What Michael did was no different than placing a countertrend. According to Investopedia, a countertrend trading strategy takes investment positions inverse to the current trend. This strategy is primarily used when a trader sees strong potential for a reversal. To mean a countertrend is no different that a salmon swimming upstream...you know how things end for the salmon right.
After the 3 million share purchased, Michael told Barron’s that he felt GameStop’s balance sheet was very good shape and the company’s cash flow justified a higher share price. He went on to explain that he believed around 90% of GameStop's stores were free cash flow positive.
Michael was hoping to have some influence on the Board of Directors after purchasing 3% of the outstanding share. Michael tried to persuade to the Board use cash for share buybacks and debt reduction, and selling and leasing back some of the companies' properties.
Lets fast forward... in May time frame...Michael’s investment firm sold 598,071 GameStop shares. In June, Sony revealed PS5 during a livestream event. The biggest surprise was A Sony revealed two PS5 consoles: a standard version with an optical drive for physical games and a digital version that could be $50 to $100 cheaper and might appeal to gamers who don't buy physical games.
GameStop has been contending with people increasingly downloading games rather than buying physical copies. Management admits this -- and the company is pushing downloadable games and prepaid subscription cards -- but it still faces a lot of competition.
Aside from the growth of downloadable games on the PlayStation and Xbox, there are a variety of places people can get digital titles like Steam or Epic Games. Even Sony and Microsoft have their own streaming services that allow you to download games directly to a console or other device.
Surely the new consoles will likely lift GameStop's sales in the short term, but with digital delivery taking over, software sales will remain under pressure for the brick-and-mortar retailer.
Last week, GameStop reported their first quarter earnings. Sales were $1.02 billion, down 34% year-over-year. Same-store-sales declined 30%, or 17% if you exclude stores that were closed during the quarter due to Covid-19. This resulted in a net loss was $103.9 million, or $1.61 a share vs. 95 cents per share Wall Street was expecting.
Several weeks ago, I noticed unusual options activity in GameStop. The Smart Money was buying October put options at the $1.50 strike price. Yesterday, they added to their current position by buying close to an additional 5000 contracts.
If price is able to get to the $1.50 level, it will mark the lowest level for the company in history and a nice paycheck for the Smart Money.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
Posted Using LeoFinance
