Don't Ignore The Gaming Sector

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Computer gaming and console gaming are in decline, but they are not dead. In fact, Activision Blizzard (NASDAQ: ATVI) latest installment of the Call of Duty franchise is setting records. Savvy investors should consider purchasing some of the stronger game companies at attractive valuations in a declining industry.

Valuation

Game stocks trade at cheap price multiples:

Ticker

Company

P/E

P/S

P/B

P/FCF

ATVI

Activision Blizzard

14.54

2.81

1.16

10.99

EA

Electronic Arts

1483.5

1.11

2.15

13.08

KNM

Konami

14.48

1.11

1.23

18.26

SNE

Sony

NA

0.13

0.44

18.65

TTWO

Take-Two Interactive

NA

1.27

2.34

NA

Many of these out of favor stocks are dirt cheap. Activision Blizzard, Sony (NYSE: SNE), and Konami (NYSE: KNM) trade at low price-to-book multiples. These stocks are cheap even without considering their significant off-balance sheet intellectual property assets. Investors should mull over these stocks as cheap buy candidates. It seems as though the market has priced in industry headwinds into Sony, Konami, and Activision stock prices.

Call of Duty Hits $1 Billion Mark Faster Than Avatar

Don’t let the low valuations fool you: Activision Blizzard is doing great. Its Call of Duty: Black Ops II has grossed more than $1 billion in retail sales within fifteen days of its release. The game earned more than $500 million on the first day of release itself. This is movie-release-level excitement: 16,000 midnight openings were held and millions of fans had attended them. The sales reached the $1 billion figure faster than the blockbuster movie Avatar. Avatar is the record holder for feature films. Last year, the previous installment of the series took sixteen days to reach the $1 billion dollar mark.

Since the launch of Call of Duty the cumulative franchise revenues from worldwide players are more than box office collections around the world for the top 10 films of 2012 in terms of collections. Call of Duty Sales have exceeded the box office take for Harry Potter and even Star Wars. These are two of the most successful movies ever.

The latest Call of Duty release puts players in the middle of the action in future war games in cities in America. Call of Duty is available on Xbox as well as Play Station 3 (the videogame console of Sony). Nintendo’s Wii U will also be able to play the game.

Strong Financial Results

Activision is the largest seller of video games in the world. It has topped third quarter revenue estimates as well as profits in the last quarter. Due to slowdown in the economy and rise in free games, sales were down in the previous year. The share price of the company has fallen about 8.8% this year. The company has gotten through the rough phase in the industry by developing new games and maintaining the old games.  World of Warcraft: Mists of Pandaria got the company about 1 million subscribers online in the quarter. Diablo III was the best-selling game for PC’s. Skylanders Spyro’s Adventures, the console game, generated more revenue than any other game in its category in the first nine months, if accessories such as action figures are included.

Profit for the fourth quarter exceeded forecasts. The net income of the company grew to $226 million, a rise of 53%. Last year, the same figure stood at $148 million. Third quarter sales (excluding changes in deferred revenue) have risen to $751 million by 20%. This figure is greater than the analysts’ expectation of $710.2 million. The company has projected fourth quarter sales (excluding changes in deferred revenue) to be about $2.41 billion, and profit of 70 cents per share. The company’s projected figure is higher than the expectations of analysts who predict the fourth quarter sales (excluding changes in deferred revenue) to be about $2.34 billion with a profit of 67 cents per share

Skylanders Giants was released in October and has done well in terms of sales. In the first two weeks 324,000 units of software of the game were sold. Skylanders Giants could earn the company about 12% of its revenue in the current quarter. Call of Duty is expected to earn the company about 70% of its revenue.

Life in Console and Computer Gaming

Veterans in the game industry expect a reversal in a year of declining sales of retail video games after the release of Assasin’s Creed III, Ubisoft Entertainment’s action adventure game. Stale video hardware and a lack of new releases are being blamed by analysts for the fall in sales. Wii U, the video game console from Nintendo could help energize customers.

Investor sentiment for gaming could also be changed based on Microsoft’s (NASDAQ: MSFT) plan to launch a new version of its Xbox console by the 2013 holiday season. The new model is expected to generate sales during Christmas and Thanksgiving next year. The device could be called as Xbox 720 or Xbox Infinity.

The Xbox economy is strong. Microsoft’s Halo 4 made waves with more than $220 million in sales within 24 hours of release. This was achieved despite being available exclusively on Microsoft’s Xbox 360 videogame console.

Activist investors are starting to take notice of gaming stocks, and the broader market could follow suit. Activist investor Carl Icahn increased his stake in Take-Two Interactive Software (TTWO) from 11.69% to 12.9%. The company will release a new installment in its infamous Grand Theft Auto franchise, GTA V in spring 2013.

Conclusion

Investor worry about the future prospects of gaming companies has made this a great time to pick up some of the cheaper names in gaming. Activision Blizzard is worth further research as a buy candidate.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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