Video Games: Which Can You Play for Gains?

By Bill Edson - November 26, 2012 | Tickers: ATVI, EA, MSFT, SNE, TTWO | 0 Comments

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Investors are buying mobile device games and social games while they dump console and personal computer games. Does that mean all these video game stocks are garbage, or have any good companies been thrown out with the bad? Can traditional gaming prove resilient in the face of mobile gaming and social network-based gaming?

Gaming Alive and Well

Activision Blizzard’s (NASDAQ: ATVI) battlefield simulation “Call of Duty: Black Ops II” has crossed the $500 million in retail sales on the first day of sales, Nov. 13, 2012. Activision mentioned that the sales came after millions of fans attended the more than 16,000 midnight openings at retail stores worldwide. This was just a week after the release of Microsoft’s (NASDAQ: MSFT) “Halo 4.”  Halo 4 cost about $40 million to produce and took four years to finish. Sales have topped $220 million in just a day of sales, a feat that is particularly impressive because it is exclusively available on Microsoft’s Xbox 360 video game console. In contrast to this, Call of Duty was launched on both Xbox as well as Sony’s (NYSE: SNE) PlayStation 3, and will also be available on Nintendo’s upcoming Wii U console. Both games have a price point of roughly $60.

Game industry veterans are looking forward to the two games to reverse the slump in retail volume sales that has led to contraction in overall sales for nearly a year. But the low sales have been blamed on the lack of new games and stale video game hardware. Investors are nervous as there is lack of interest in Wii U as well as traditional video games. Shares of Activision have fallen more than 10%, and those of Electronic Arts have fallen more than 33% YTD. Analysts are now unable to predict business.

The Call of Duty title “Modern Warfare 3” saw $400 million in sales in the North America and the United Kingdom on its first day in the market. It grossed over $1 billion in sales in just 16 days. This was more than the sales for the blockbuster Avatar, which reached that figure in 17 days.

Nintendo Wii U sales

The relevance of console gaming is being demonstrated by the popularity of Nintendo’s latest console. The demand for Nintendo’s new Wii U has been great as of now, and many think that this demand will continue to the beginning of 2013. According to researcher HIS, Nintendo is most likely to sell around 3.5 million units in the United States this year. The company’s North American president, Reggie Fils-Aime, said, “The value of Wii U goes well beyond day one. Nintendo will be enhancing the Wii U experience with continuous updates and new services for Wii U owners.” He also added that the integration of the software with the hardware can create groundbreaking experiences.

This isn’t just for nerds. A cool aspect of the Nintendo Wii U is how five players can play at a time, potentially involving the whole family. This shared experience may enlist more participants to purchase supporting products. The Wii U does not incorporate all services, and has delayed incorporating content like Amazon’s Instant Video and Google’s YouTube. While analysts have been saying that the company should focus on the video game software rather than the hardware, Nintendo is saying that it would continue the same as it did earlier.

Icahn stake in Take-Two

Fabled investors are placing bets on gaming firms. Take-Two Interactive Software (NASDAQ: TTWO) was recently in the news after Carl Icahn, an activist investor, increased his stake in the company from 11.69% to 12.9%. The company’s shares remained flat at $11.47 after the news came out. The company, which is popular for its well-known game “Grand Theft Auto,” is said to release a new version of its game, “GTA V,” in Spring 2013. Sterne Agee analyst Arvind Bhatia said, “As we get closer to GTA V, he's upping his stake. This is just more endorsement of how he sees fundamentals of Take-Two developing.” S, it seems that Carl Icahn is hoping that this new version will help the company generate more revenue, raise its profits, and boost fundamentals. Not only that, Take-Two may be a potential acquisition for Electronic Arts (NASDAQ: EA), another video game company.

Valuation

Some stocks with significant stakes in console gaming are cheap:

Notice how many of these out of favor stocks are cheap. Sony, Konami, and Activision Blizzard trade at low price-to-book multiples for stocks with significant off-balance sheet intellectual property assets. Investors should consider these stocks as cheap buy candidates, cheaper than Icahn’s Take-Two Interactive pick. The industry faces headwinds, but its sales are resilient and the prices of Sony, Konami, and Activision have priced in these difficulties.

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