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TheStreet Open House

Why This One Game Maker Could Rally Following Console Updates

Stocks in this article: ATVIEAGMEMSFTSNEZNGA

Chris Lau, Kapitall: The rise in shares of GameStop (GME) was irrational. Bears were caught in a short squeeze, after betting that the market for used games would be hurt when new consoles from Sony (SNE) and Microsoft (MSFT) were released. GameStop shares peaked at $40, but sold off sharply after the Xbox One was announced. By comparison, game maker Activision (ATVI) held its value. Activision recently broke out of a narrow trading range between $14 and $15, closing recently at $15.75. The value of Activision is being led by the actions of Vivendi (VIVHY) . Vivendi holds 61%, or more than $10 billion, of Activision shares. Vivendi wants to sell its holding back to Activision, but the negotiations were halted recently.  (Research all of the stocks mentioned in this article here .)

Even though bears will be proven correct that profitability in used games will decline for GameStop, their timing was early. Now that the news is out that Xbox One games be negative for GameStop, investors should avoid the retailer. According to MCV , Microsoft and other game makers will take a cut from every used game sale on the Xbox One. This will be made possible by cloud servers on Xbox One being used to manage the ownership rights for pre-owned games.

GameStop expects the initial prices for the new consoles will be lower, and that acceleration in game sales for them will happen in 2014. Since a large proportion of game sales will be via digital downloading, it will be net negative for GameStop and highly positive for game makers. Despite the challenges, GameStop is partnering with Sony and Microsoft, and will remain relevant as consumers move to the PS4 and Xbox One.

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