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Are Digital Downloads Hurting GameStop?

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Shares of GameStop fall 21.8% in the trailing-12-month period

Shares of GameStop (GME) have fallen by 21.8% from $34.46 to $26.94 in the trailing-12-month (TTM) period, as of January 13, 2016. There have been concerns that the increase in digital downloads is impacting the video game retailer.

Oppenheimer analyst Brian Nagel stated it is becoming “more and more likely that digital disintermediation is weighing upon software sales,” which he states are “a key focus point for investors.” He went on to add, “Despite the aggressive efforts of management to diversify the GameStop business model and growth in new areas such as tech brands and loot, we believe the market will stay focused upon the core software category.”

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Analyst Michael Pachter from Wedbush Securities expects physical software sales to have fallen by 15% in December 2015, which was a “lot worse than expected.” Pachter stated that the decline in sales is not a sign of low demand, as bundles are increasing in popularity. He also stated that 20%–30% of total software sales were delivered over the PlayStation (SNE) Network and Xbox Live (MSFT), suggesting that GameStop missed an opportunity to make a “physical sale.” Sales for Japan-based (EWJ) Sony PlayStation 4 and Xbox One rose by 4.5% in the nine weeks ending January 2, 2016.

GameStop narrows earnings guidance

On January 12, 2016, GameStop narrowed its 4Q15 and fiscal 2015 earnings guidance. The company expects 4Q15 EPS (earnings per share) to be in the range of $2.19–$2.25, as compared with the previous guidance of $2.12–$2.32. GameStop expects to see fiscal 2015 EPS of $3.69–$3.75, as compared to the previous guidance of $3.66–$3.86.

Microsoft constitutes 2.3% of the SPDR S&P 500 ETF Trust (SPY).

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