Which Gaming Stocks Should You Buy Before This Holiday Season?

By Bill Edson - September 29, 2012 | Tickers: ATVI, GME, SNE | 0 Comments

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The holiday season is just around the corner, and gaming companies are implementing their sales strategies. Which gaming stocks are worth buying, and which ones are lumps of coal?

A New PS3

The largest exporter of consumer electronics in Japan, Sony (NYSE: SNE), expects annual holiday sales to match those of last year. Andrew House, the head of Sony’s game business segment, said sales will be “somewhere close to the range of last year.” Mr. House also noted that the sales are meeting expectation for its recently-launched version of the PlayStation 3. These new PS3 consoles have more memory and are tinier and lighter than older models. These new PS3 consoles will soon see sales in North America starting at a $249 price tag.

The release of the new PS3 comes during a regime change at Sony. Kazu Hirai became the chief executive officer this April and began to change the loss-prone company by announcing a plan to cut nearly 10,000 jobs. He is looking over the gaming unit as well for cuts. Sony is making several attempts to get back to profit after facing 4 consecutive losses as a result of global economic slowdown. The company also faced losses due to customer migration toward Apple and Samsung Electronics.

The representative of Sony said in January that the company had sold above 6.5 million consoles that include portable as well as home models last year during the Christmas holiday season.  Mr. House said that the sales from the online portal are increasing. He further mentioned that Sony will launch PlayStation Mobile services on October 3rd which can be downloaded by buyers on their smartphones along with tablets.

The Wii U Launch

Gamers are queuing up to grab the Nintendo’s latest Wii U video game console even as the launch is still more than a month away. Pre-orders for the console have started catching speed as retailers declared that they are “sold out” already. But, many analysts have a different point of view. They believe that Nintendo is using limited supplies to creating buzz. Constraining inventories and initial sales may be justified since, thus far, the new gaming console has failed to inspire widespread excitement.

Nintendo’s shortage of consoles could mean that the Wii U will be a huge hit just like its predecessor. It might also mask a tepid demand. There is no way to know what sales could have been achieved with an excess inventory.

After the company finally announced the pricing and availability in the past week, almost all of the retailers opened pre-orders assuring the gamers that the launch would be on November 18th. But, orders were filled in just few days. Some of the sold-out retailers were Best Buy (BBY), Kmart (SHLD) and Target (TGT). The pre-order allotment of Deluxe Wii U has run out at GameStop (NYSE: GME) but the basic version remains available. Wal-Mart, too, has not been able to cope with the ongoing demand. Although both of the SKUs have gone out of stock, Wal-Mart is still pre-ordering bundles that include Wii U game and a Wii remote for an additional $50. Worse yet, the Wii U is not available at all from Amazon. But, third-party retailing partners of Amazon have started providing the Wii U from $450 to $700 on the Amazon platform.

Valuation: Stocks in the Console Gaming Ecosystem

There are some companies for which new versions of consoles are a blip on the radar screen. For example, Wal-Mart will not be grossly impacted by these sales. Neither will Amazon.

GameStop, however, is likely to notice increased foot traffic and game sales. Software developers who publish games for these systems will also feel a lift.

Consider the following stocks which will be impacted the most by the introduction of these new gaming systems:

Notice how many of these stocks are very cheap. This is because they are out of favor. There is a prevailing belief that gaming is moving to social media and mobile devices at the expense of console-based gaming. Higher valuations can be found in those hotter areas.

Fortunately for value-conscious investors, these stocks are not as glamorous and are trading at low valuations. Sony and GameStop trade at discounts to their book value. In fact, the price-to-book values for all these stocks are below the average for the S&P 500 index companies, even though they often have significant off-balance sheet intellectual property. Such intellectual property can include brands, copyrighted materials like fictional characters, and patented technology.

With the exception of Electronic Arts, all of these companies are also trading at attractive price-to-free cash flow multiples. A similar observation can be made for the price to sales ratio, which is very low for all companies except Activision Blizzard (NASDAQ: ATVI).

If there is a recovery in console gaming coming, these stocks will surprise analysts and the market. Investors should accept that across the globe there is a wide following of gamers who are literally addicted to these companies. They need these games and consoles more than Apple followers need the next version of iPhone, and even more than Star Trek fans need Star Trek. These addicts have a good chance of making mobile and social gaming look like a silly fad.

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