A Quick Sales Jolt From New Game Systems

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

Microsoft and Sony are both getting ready to launch new game consoles. This could provide a quick jolt to sales at Activision Blizzard (NASDAQ: ATVI), Electronic Arts (NASDAQ: EA), and particularly at GameStop (NYSE: GME).

A New Cycle

The video game business tends to move in cycles around the launch of new game systems. Each time a new system comes out, customers buy the upgraded systems and a set of new games. Since the main console companies tend to release their new systems at roughly the same time, it makes the industry highly cyclical.

Microsoft is getting set to launch the new Xbox One system while Sony is teeing up the PlayStation 4. Both will incorporate more game downloading features while at the same time trying to reach further into the living room. Microsoft has been touting the One as a media center while Sony has taken a more traditional course, aiming squarely at its core gamer market.

New Games

Gamers are likely to be tight fisted with their game budgets until the new consoles come out. Why waste money on outdated technology when bigger and better game experiences are on the horizon? That could lead to anemic video sales over the near term.

However, once the new consoles hit, which will probably be toward the end of the calendar year, game sales are likely to spike as a new upgrade cycle begins. That should be good news for EA, where sales have declined year-over-year in each of the last four quarters. Despite a solid lineup of games, the company could use a quick shot in the “sales arm.”

EA's shares are still well off their highs in the $70 range, but have started to move higher recently. Look for sales to jump when the new consoles come out around the holiday season. There's probably some nice upside here, but investors will likely have to buy in before the consoles hit.

A Booster Rocket

Activision Blizzard hasn't seen the same top-line shortfall as EA, posting higher sales every year for the last decade. That's particularly impressive since the deep 2007 to 2009 recession had a chilling effect on the retail environment. Activision's shares have charted a steadier path and recently appear to have broken out of the range they've traded in since the recession.

That could make Activision of interest to momentum accounts. However, those looking for growth should also take a look. The company's top line has continued to expand despite aging game consoles and the new consoles should add a quick jolt to the top and bottom lines toward the end of the year with stronger sales likely to last into next year, too. Like EA, it would be best to climb aboard before the new consoles hit.

Brick and Mortar

The biggest beneficiary might actually be GameStop. There is no doubt that the launch of the new consoles will present a long-term problem for the company as they push users toward downloaded content and away from physical game sales. So, on some level, Sony and Microsoft are looking to squeeze out this middle man.

However, for the six months or so following the launch of the new game systems, GameStop has an edge that others don't—trade ins. This is a core part of the company's business, representing about 25% of its top line. The money people get for trading in old gear and games is usually spent on new gear and games.

As customers upgrade to the new gaming systems, they aren't going to be trading in a couple of games, they will likely trade in everything they have. That will mean a big uptick in business for GameStop in the months following the release of the new consoles.

A Bounce

The retailer's top line has fallen over the last two years. The shares have recently pulled back after hitting a high around $40, still well below the highs reached prior to the recession. While the company has long-term challenges ahead, it is working to adjust its business to a digital world. A quick jolt from trade ins of old game systems and games could push the shares higher again.

That said, investors are probably best off waiting for a near-term pull back into the high 20s. That would test the upper bounds of a price range that the recent advance pushed through. Don't get attached to the company, however, because it still has long-term issues to address.

And it Begins Again

The video game cycle is set to start again. That should be good news for the game makers, particularly struggling EA. However, it should be particularly good news for GameStop in the near term, as it benefits from trade ins of older technology. While this won't change the retailer's long-term outlook, it could be enough to push the type of quick ascent that would interest a momentum investor.

While Activision and Microsoft have been taking the headlines when it comes to console gaming, investors following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. The Motley Fool's special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard and GameStop. 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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