Video game sales have been disappointing for some time. The main reason for sluggish sales has been the high price points for video game consoles (>$200) combined with consumers cutting back on discretionary purchases. In addition, those consumers that are still actively buying video games are playing their favorite games longer than in previous years.
As a result, the earnings estimates for video game stocks haven’t been moving in the right direction. However, companies in video game industry are in a position to change that trend and deliver upside surprises in the near future. Getting into these stocks before the analysts start raising estimates could deliver decent returns.
Software Sales Have Bottomed
While software sales in June were down 15% year-over-year, sales increased 14% from May. May sales were up 4% from April.
What’s more, hardware sales are on fire. Console makers have dramatically cut prices on the Xbox 360, Playstation 3 and Wii. Combined console sales climbed 54% year-over-year in June to nearly 1.2 million units. The price cuts will hurt the console makers’ profit margins, but the owners of those new 1.2 million video game consoles will be buying games for their new systems.
That’s good news for the software side of the business, which saves its best games for the second half of the year. For video games, the unofficial holiday season kicks off with the August release of Madden NFL 11. There several other titles that will be popular with gamers. These titles include Halo:Reach, Gears of War 3 and Call of Duty: Black Ops.
Online Play
Games like Madden, Halo and Call of Duty have become so successful that today’s gamers continue to play those games for hundreds of hours beyond what was expected by the game developers. The longer game lifespan comes from the ability to play these games online with other gamers. Online play goes beyond the storyline written for these games. The game developers have a provided a virtual play area for gamers that want to team up with their friends and try to defeat other teams in various warfare scenarios or play a football game against a human opponent.
Online play is extremely popular, but it can hurt the sales of new games. It is also essentially free. Video game developers haven’t done a lot to monetize online play. Sure, Call of Duty has offered additional maps for a charge, and the sports games are allowing advertising in their virtual stadiums. I think that is only a start. In my view, these online playgrounds will soon begin charge a fee to play their online versions and begin to allow even more advertising. When the video game developers finally begin to charge for their online offerings, profit margins will expand well above current expectations.
New Technology
Ever since the Wii came out, both Microsoft (MSFT) and Sony (SNE) have worked on their own technology that allows gamers to use body movement to play games. This year those plans are hitting the market. Gamers got a preview of Microsoft’s Kinect and Sony’s Move at E3. Both companies plan to roll out their motion-controlled devices in the fall of 2010.
The Kinect and Move will usher in a new era of gaming beyond the basic sports games like bowling, tennis, or fitness/exercise work-outs. Players will become fully immersed in games that require dancing, jumping, catching, hitting, running, and even driving. The Kinect also allows gamers to navigate the Xbox 360’s dashboard without a controller. Using voice commands and hand gestures (a la Tom Cruise in The Minority Report), Xbox users can watch movies, play games, chat with friends or even Facebook — all without touching a controller.
Here are three ways to participate in the upcoming advance in video game sales:
Activision Blizzard (ATVI) publishes interactive software products and peripherals. Its products cover various game categories, such as action/adventure, action sports, racing, role-playing, simulation, first-person action, music and strategy. Its games include Guitar Hero, Call of Duty and Tony Hawk.
The company had first-quarter EPS of $0.07, beating the Zacks Consensus Estimate by 5 cents, or 250%. ATVI has beaten the Zacks Consensus in four of the last five quarters.
In the last month, the Zacks Consensus Estimates for 2010 and 2011 are each down a penny. Activision Blizzard is scheduled to report second-quarter results on August 5.
ATVI is a Zacks #4 Rank stock. Its shares trade at 18x 2010 EPS estimates and 16x 2011 EPs estimates.
GameStop (GME) is a retailer of new and used video game hardware, video game software and video game accessories.
For the first quarter, GameStop earned $0.47 per share, an increase of 11.6% compared to the year-ago quarter. It also beat the Zacks Consensus by a penny, or 2.1%. In the last three quarters, GameStop has beaten the Zacks Consensus Estimate by an average 2.3%.
In the last month, the Zacks Consensus Estimates for 2010 and 2011 have been flat. The video game retailer is scheduled to report second-quarter results on August 19.
GME is a Zacks #2 Rank stock. It trades at 8x fiscal 2011 consensus estimates and 7x fiscal 2012 consensus estimates.
Take Two Interactive (TTWO) publishes, develops and distributes interactive entertainment software under the labels Rockstar Games and 2K, which publishes titles under 2K Games, 2K Sports and 2K Play. Its brands include Grand Theft Auto, Sid Meier’s Civilization, NBA 2K and NHL 2K.
The company reported fiscal second-quarter results of $0.23, topping the Zacks Consensus by 6 cents, or 35.3%. Take Two has beaten the Zacks Consensus in the last five quarters by an average of 35.3%.
In the last month, the Zacks Consensus Estimates for 2010 and 2011 are flat.
Take Two has a Zacks #3 Rank, and its shares trade at 12x fiscal 2011 consensus EPS estimates.Zacks Investment Research
