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Is GameStop Getting Zynga’ed?: Greenberg | March 23, 2012 | 11:57 AM EDT

Gamestop is shaping up to be one of the really great battleground stocks of this year.

The big question is whether Zynga and the rapidly changing world of gaming are doing to GameStop what Netflix did to Blockbuster.

Investors are betting it is.

GameStop's short interest, a bet against the company, has spiked over the past few weeks. It’s now 41 percent of GameStop’s shares outstanding, making it the most heavily shorted stock in the S&P 500.

GameStop announced earnings Thursday morning and its stock started out in the green even though comparative stores sales and guidance were dismal, at nearly double-digit levels.

The stock then faded into the hour-plus earnings call after, among other things, the company's comments left investors concerned about the timing of Microsoft’s next-generation console — especially whether the new consoles would block used games by using flash memory instead of a hard drive. Responding to one of several questions on the subject on the company’s earnings call, CEO Paul Raines said he believes that’s “unlikely,” because used games have a residual value.

Still, his lack of conviction left the market concerned, which gets to the guts of the battle:

  • Can GameStop pull off its digital transformation?
  • Can its high margin used-game and used-product business continue to thrive?
  • Should investors be comforted by its lack of debt and huge cash flow, which has turned GameStop into a stock buyback story?
  • Or is GameStop the next Blockbuster?
  • My take: Newspapers had big cash flows, too. (Favorite part of this story is that Janney Capital Markets’ analyst, Tony Wible — perhaps best known as one of the most ardent Netflix bears — is among the biggest bulls on GameStop. “While competitive risks remain and questions about the health of the game cycle will linger, we believe the low street expectations and [a number of potential catalysts] create a positive risk/reward.” No herd follower he.)

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