Sony (SNE) dropped a bombshell on Tuesday at the Consumer Electronics Show. The company announced its new streaming service, PlayStation Now. The service will provide instant access to classic games for the PS1, PS2 and PS3 over the Internet. In addition, gamers will be able to play across devices such as televisions and tablets.
The new service will work with Sony's new gaming console, the PS4. By allowing gamers to have backwards compatibility, Sony can differentiate its gaming platform from Microsoft's (MSFT) Xbox 360, which does not allow backwards compatibility.
The announcement sent GameStop (GME) investors running for cover. Investors have always been concerned the new gaming platforms would have the ability to stream games over the Internet and cut GameStop out of the picture. (Like Netflix (NFLX) did with Blockbuster.)
PlayStation Now users will be able to subscribe to a catalog of previously released games and play games without having to leave the sofa. Players can also hook up Sony's new Bravia television directly to the Internet and play games on their TV without a separate game console as well.
When the Xbox 360 and the PS4 were announced last year, it seemed there was a détente between the game makers and GameStop. Nobody was willing to bite the hand that feeds it. Now, it seems all bets are off. Microsoft has been quietly working on its own cloud gaming platform. Microsoft's new title Killer Instinct cannot be purchased in a store. It's only streamed through the Xbox 360 with a subscription.
None of this is news to short sellers who have been predicting GameStop's demise for years. As of mid-December, there were 23 million shares sold short and at the current volume it would take about five days for the shorts to cover their positions. This is down from the 12 days-to-cover back in October. It seems short sellers reduced their positions going into the holidays in order to avoid any nasty upside surprises.
Microsoft announced on Monday it had a worldwide sell though of three million Xbox units from its November 22 launch until December 31. Despite the "most epic of Xbox launches ever" hyperbole, the sales figure is in-line with the consensus estimate.
Using its market share, GameStop will probably sell 1.7 to 1.8 million Xbox units in the U.S. and Canada. Those figures should lead to a same-store sales increase between 15% and 20%. Analyst estimates of SSS of 9 to 10% are too low. The consensus estimates of $3.25 for fiscal 2014 and $4.01 for FY2015 are low and will have to be raised. If I'm right, GME should be able to trade as high as $60, despite the Sony announcement. This stock could still have game.