Is This Finally a Positive Signal for GameStop?

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

On Thursday, private company Gazelle presented at the Wedbush Transformational Technologies conference in New York City. Gazelle is a private web-based company that purchases consumers’ used cell phones, tablets, laptops and other high-end consumer electronic (“CE”) devices online for resale. Gazelle currently focuses its CE acquisitions in the U.S., and stated that it will remain focused only on developed markets for product acquisitions. For the resale portion of its business, it has partnered with 35 global buyers, primarily in developing markets where resale price points are higher for used CE devices. According to the company, there is five times the demand for used, high-end CE devices in these developing markets compared to the supply available. The primary constraint the company currently faces is low consumer awareness of the resale value of these used products, and thus, low resale rates. Gazelle generated approximately $30 million in sales in its most recent quarter, but aspires to generate $500 million annually by 2015. The company estimates the addressable U.S. market opportunity to be $5 billion annually by 2015.

Gazelle is attempting to drive awareness of the resale value of used, high-end consumer electronics devices. According to the company, 51% of domestic consumers do not resell their used devices, while 31% recycle their used devices or give them away to a friend or family member. This 82% of CE device owners represents Gazelle’s target market, which it believes it can garner by driving consumer awareness of the high resale value as well as driving brand awareness. The company stated that 8% of consumers trade in their used devices at retail – GameStop I.E., (NYSE:GME), Best Buy (NYSE:BBY), RadioShack (NYSE:RSH), Target (NYSE:TGT) — 7% sell the used devices on Craigslist or eBay, and the remaining 4% sell to a trade-in site like Gazelle.

We view Gazelle’s commentary as a positive read-through for GameStop. We view Gazelle as a pure play comp for GameStop’s re-commerce business. However, Gazelle was clear in its presentation that GameStop’s trade-in customer is not Gazelle’s target. It is instead looking to grow the online trade-in market by driving awareness of the high resale value of these used CE devices, directed specifically at those consumers who do not currently trade in their used devices. Furthermore, Gazelle is primarily focused on selling internationally, in developing markets, not to its own customers as GameStop does so adeptly. In addition, Gazelle commented during its presentation that GameStop clearly understands the market for used tradeins, whereas its retail competitors may be missing the mark. We concur, and expect Gazelle’s business model to be complimentary to GameStop’s, as both broaden the re-commerce market over the next few years.

We believe GameStop is…